Carried Interest, 1031 Exchanges On Chopping Block In Biden's American Families Plan

President Joe Biden outlined the details of his American Families Plan bill Wednesday morning ahead of his address before Congress Wednesday night, and its proposed tax increases could hit the commercial real estate industry hard.

Joe Biden
President-Elect Joe Biden

The president's plan adjusts or eliminates some of CRE's pet policies — tax breaks on capital gains and property passed down to heirs, as well as the 1031 exchange program.

The White House said in a fact sheet posted Wednesday the plan would "end the special real estate tax break" of 1031 exchanges for gains larger than $500K. Under the 1031 program, investors defer capital gains taxation when they sell a property if they purchase another similar asset in a short period of time.

The strategy was projected to save investors $41.4B between 2020 and 2024, according to Congress’ Joint Committee on Taxation, Bloomberg reports. The elimination of 1031s for well-heeled investors could have unintended consequences for CRE, according to The Bachman Law Firm principal Judith Bachman.

"For instance, if it is eliminated, some investors might hold on to properties for longer than in the past, and it would thereby have the effect of decreasing supply and demand," Bachman writes.

The plan would also nearly double the capital gains tax on investors making over $1M a year, a change that would impact a significant number of the most successful real estate pros. Currently, the capital gains tax for individuals making more than $445,850 is 20%. The plan would raise that to 39.6% for $1M-plus earners, or to the same rates as for ordinary income.

The president's proposal also would raise taxes from 37% to 39.6% on individuals earning more than $400K a year and would beef up enforcement by the Internal Revenue Service against the wealthiest Americans, including corporations. IRS Commissioner Charles Retting told the Senate Committee on Finance this month that the country is leaving about $1 trillion in unpaid taxes on the table annually because of inadequate enforcement.

Capital gains on inherited property are also under the gun. Current policy allows assets to be passed between generations on a "stepped-up" basis, automatically adjusting the value of inherited property and not enforcing any capital gains. Biden's American Families Plan proposes eliminating this practice for gains in excess of $1M or $2.5M per couple "when combined with existing real estate exemptions."

Biden said the current probate policy allows billions of dollars in capital income to "escape taxation entirely." Those in the real estate industry say changing the stepped-up basis could cost commercial real estate investors millions of dollars and significantly undercut profits.

The focus of the American Families Plan, according to the president, will be on expanded spending for childcare, education, paid leave for caregivers and other supports for the “care economy,” driving as much as $1 trillion in new spending.

Biden will address a joint session of Congress Wednesday night to officially pitch the bill and give updates on his first 100 days in office.

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