President Obama’s Proposed Tax Increases

Use 1031 Exchanges to Purchase More Property

President Obama, in his State of the Union address on January 20th, outlined a number of tax increase proposals that his Administration projects would raise $320 billion in new revenue. Two of the President’s proposals would, if enacted, have a significant impact on real estate investors:

• Increase Capital Gain Tax Rate: The President has proposed increasing the top capital gain tax rate from 20% to 28%. Under current law, many real estate investors in the top tax bracket face an additional 3.8% tax on Net Investment Income under IRC Section 1411, resulting in a total tax rate of 23.8%. Under the President’s proposal, this would increase to 31.8%.
• Eliminate Stepped Basis at Death: Under current tax law, when a taxpayer dies, the taxpayer’s heirs receive a step-up in the basis of inherited property. The basis is stepped up to the fair market value of the asset on the date of death. President Obama has proposed eliminating this stepped-up basis, which will result in the built-in gain remaining in the property after it passes to the heirs. Although the President has proposed some small exclusions ($200,000 on general asset gains and $500,000 for a taxpayer’s primary residence), eliminating the stepped-up basis would seriously impact the heirs of investors who die with appreciated assets.

Tax Planning Certainty – 1031 Exchanges

Tax strategies which take advantage of the current tax code are a much better way to achieve tax benefits today. IRC Section 1031 tax-deferred exchanges have been a part of the tax code since 1921. Section 1031 allows an investor who holds property for investment purposes, or for use in a trade or business, to defer all four (4) levels of potential capital gain taxes (federal capital gain, federal depreciation recapture, net investment income, and state capital gain) by exchanging for qualifying like-kind property under Section 1031. By deferring the capital gain tax, an investor has significantly more purchasing power and better overall investment returns.

Let’s compare the tax treatment for the sale of an investment property between: (i) paying all the taxes owed, or (ii) using a 1031 exchange to defer 100% of the taxes owed. We will assume the property has total capital gain of $1,300,000, $300,000 of which is from depreciation recapture, and $1,000,000 of which is from asset appreciation. For this example, we will assume this is a California investor who has a 13.3% state tax rate, and we will assume the investor is also paying the 3.8% net investment income tax (NIIT) on the entire capital gain:

Replacement Property Purchase Comparison – Sale vs. Exchange

Assume the investor in the previous example sold the relinquished property for a total net sales price of $2,000,000, with, as stated above, $1,300,000 of total capital gain. Assume the investor intends to apply the sales proceeds toward a 25% down payment on a replacement property, with conventional financing for the remaining 75% of the replacement property purchase price. We will compare how much property the investor who sells and pays all the taxes can purchase, versus how much property the investor who exchanges and defers 100% of the capital gains tax can purchase.

By taking advantage of a 1031 exchange, the investor defers all taxes thus preserving their net sales proceeds for the purchase of better performing replacement property. In this comparison, the investor who exchanges versus sells is able to purchase a replacement property worth considerably more ($8,000,000 versus $6,010,800). In times of economic and tax uncertainty, it is important to utilize the tax advantages currently available in the tax code. Call the experts at Asset Preservation to discuss 1031 exchanges and your investment property situation.

1031 Basics: Requirements For Full Tax Deferral

How much replacement property must I acquire in my tax deferred exchange in order to defer all of my capital gains tax? In our experience, some investors often confuse 1031’s requirement for tax deferral with their estimates of their potential capital gain. To learn what is required for full tax deferral in a 1031 exchange, click on Requirements for Full Tax Deferral.

Congress Threatens To Eliminate 1031 Exchanges

Three separate tax reform proposals have been advanced by the House Ways and Means Committee, the Senate Finance Committee and the Treasury Department to either repeal or restrict tax deferral of gain from Section 1031 exchanges of like-kind property. Like-kind exchanges benefit millions of American investors and businesses every year. 1031 exchanges encourage businesses to expand and help keep dollars moving in the U.S. economy.

Without the tax-deferral benefit that 1031 exchanges provide, small and medium sized businesses would not be as equipped to reinvest in their businesses, real estate values would decline, the U.S. economy would suffer, and businesses of all sizes would lose the opportunity to expand. The repeal of Section 1031 will cause a decline in real estate values as investors will be motivated to hold on to properties and to invest in more liquid, non-real estate investments with faster returns. The proposals effectively impose punitive and targeted tax increases on economically sound commercial real estate investment, the likely unintended consequence of which will be similar to implementation of 1986 tax reform modifications that resulted in a recession.

Tak Action Now!
Send a strong message to congress that 1031 exchanges are a powerful economic tool. Learn more and voice your opposition to these proposals with these critical actions at www.1031taxreform.com.

From Forbes: Best Buy Cities and Where To Invest In Housing In 2015

If you are an investor wanting to purchase rental properties, there are many places where housing should perform well. The key is to buy in cities with strong job growth that people are moving to, so that the stock of potential tenants for would-be landlords is abundant. Forbes teamed up with Local Market Monitor, a North Carolina-based data company that tracks home prices and economic factors in more than 300 housing markets, to find 2015’s Best Buy Cities—the top 20 housing markets to invest in this year. Read More…

America’s Best Performing Cities in 2014

The knowledge and energy hubs of San Francisco and Texas are among the year’s biggest economic winners. Read More…

2014 National Movers Study Shows Top Moving Destinations

United Van Lines 38th Annual Movers Study results track the migration patterns state-to-state during the course of the past year. The study found that Oregon was the top moving destination of 2014. To see the other top moving destinations, Read More…

Where Wall Street is Most Likely to Cash Out of the Single Family Rental Market

After nearly three years and hundreds of thousands of property purchases, the nascent single family rental industry is at a crossroads in terms of future growth and long-term staying power. Many are wondering how many of the players will “cash out” of their property portfolios given the strong home price appreciation over the past few years — and if so how that liquidation would impact local markets with a high density of single family homes purchased as rentals. Read More…

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