President Biden's budget proposal would have a crippling impact the real estate market through its careless tax reforms and increasingly burdensome regulation. The budget would increase several different taxes rates, including how capital gains and depreciation recapture are taxed. It also is proposing possible changes to tax provisions that have been in place for decades, including Section 1250 depreciation recapture rules, Step Up in Basis for inherited assets, and most importantly, Section 1031 Exchanges.



The proposed changes would hamstring investment in both residential and commercial real estate sectors, as the changes would greatly diminish the financial viability of those sectors in the calculations of possible investors. Furthermore, increased regulatory measures aimed at environmental compliance and affordable housing mandates would raise the cost of development and reduce profit margins for real estate developers. From the top down, everyone would feel the effects of these changes.

Below is a summary of a few key changes from the Biden Budget Proposal:

1. Corporate Tax Rate Hike

- The corporate tax rate would be increased from 21% to 28%.

2. Top Marginal Tax Rate Increase

- The top marginal tax rate would be increased from 37% to 39.6%.

3. Capital Gains Tax Changes

- Currently, investors either fall into the 0%, 15%, or 20% tax brackets based on income. The budget proposal would change it so that if an investor had $1 million+ taxable income, the capital gains would be taxed at ordinary income tax rates. So an increase from 20% to potentially 39.6%.

4. Medicare Tax Rate Increase

- The Medicare surtax is currently a 3.8% tax that is levied against the lesser of the net investment income or the excess of the taxpayers modified AGI over the threshold. The proposal increases this tax from 3.8% to 5%.

5. Limitation on Section 1031

- The Biden proposal seeks to limit Section 1031 by limiting the per taxpayer tax deferral to $500,000 in capital gains per year. Any gains in excess of $500,000 would be taxed in that year.

6. Changes to Depreciation Recapture Taxation

- Depreciation recapture is currently taxed at a maximum rate of 25%. The proposal would remove this cap and require it to be recaptured at the ordinary income tax rate, potentially 39.6%

7. Elimination of Step-Up in Basis

- Step up in basis is when a taxpayer inherits a property, and their basis is adjusted from the property owner’s original basis to the Fair Market Value at the time of death of the owner. This allows the heirs to inherit a property without facing the tax implications of the years of ownership, appreciation and tax deferral that could be tied up in that asset. Biden’s proposal would limit this basis adjustment and require the decedents estate to pay recognize the taxable income.

These are just a few of the changes that have been proposed by the Biden administration in the new budget. The changes would be span across the economy and though they are purported to be primarily focused on the upper class, they will still affect small business and investors in a time when most small business and investors are already struggling to keep up with the impacts of inflation. As the taxes increase the cost of doing business and real estate ownership, those costs will be passed along to the consumer and could drastically increase housing costs and costs of goods in the economy.

Without the tax deferral mechanism afforded to taxpayers in the over 100 years of Section 1031’s existence, investors might be less inclined to sell properties, leading to decreased market activity and liquidity. This change could particularly affect smaller investors who rely on 1031 exchanges to build and diversify their real estate portfolios without immediate tax burdens. These changes could lead to a significant decrease in property values and supply availability, all while increasing the costs of ownership and housing costs for individuals.

Voice your support for 1031 Exchanges and opposition to these tax increases. Contact your local representatives and voice your opposition to the changes proposed in Biden’s Budget proposal.