The Tax Triple Threat & Biden's Proposals - YouTube

Hey guys. So in this video,

we're going to talk about what real estate investors face right now from a

tax threaten. I call I'm calling it the triple threat,

which is capital gain 10 31 and step up in basis. These are big, big deals.

Be sure and watch till the end,

because you're going to learn a lot and you can hopefully make some tax moves

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So if you've been following the news lately,

you probably already know that president Biden plans to increase the income

taxes on people who earn more than $400,000 a year.

More recently,

the administration has announced that they plan on introducing more tax reforms

that could potentially drive down real estate investing. Now,

the first proposal is an increase in the capital gains tax on those

making over $1 million a year.

So obviously I'm calling this the triple threat.

So the first thing we're going to talk about is the capital gains tax.

So based on the current proposal,

what they're saying is that the taxes could go up on a capital gains from

about 23%, the 39.6%.

Now that's obviously a pretty steep job. Okay?

So the next threat of the triple threat is what we call the 10 31

tax deferred exchange.

So obviously Biden's basically saying his in his new economic plan that

he's going to completely end the 10 31 tax deferred exchange on profits

over 500,000. So in case you don't understand what that is,

the 10 31 exchange allows you to sell an asset like a house and avoid

taxes on the profits.

As long as the profits are put into an another vestment soon thereafter.

So I'm going to go into a lot more detail on this in a second.

So the third item in the triple threat is what we call the step-up in

basis.

So currently there's something in place right now called the step-up basis.

And here's how it works.

Let's say you've inherited a house that your grandfather bought in 1980 for a

hundred thousand.

And let's say through inflation and appreciation that house is now valued at

three 50.

If you were to sell that house a year later for three 65,

the step-up basis would only make a capital gain for,

let's say 15 grand instead of the 265,000.

So the easiest way to think of this is that the original value that your

grandmother paid for the house is irrelevant when you apply for the step up

basis. And we're going to talk a little bit more about all of these in a minute.

So now let's talk about the increase in capital gains.

So what is a capital gain first? I think we should probably figure out for, for,

for many who not know. And by the way, I'm not a tax person.

I'm not a CPA, but I do pay capital gains tax.

And I do deal with this with my own CPA.

And obviously anything that we talk about here,

you need to talk to your own qualified professional,

but capital gains is basically occurs when you sell an asset for

more than you paid for it. That's what it is. So there's a basis,

which is something that you bought and what you sold it for.

The difference is the capital gain and it's expressed as an equation.

So it's capital gain, equal selling price minus the purchase price.

That's really all it is.

So now let's take a look at the capital gains and individual income

tax rates as they've gone through the year.

So you can see this is in the 1950s right here,

and this is 2020. As you can see,

this is the maximum individual tax rate,

and this is the maximum capital tax rates.

And you can kind of follow these through history based on the different

administrations. So as you can see, we're a lot lower right now than we've been.

Let's say it back in the fifties and sixties,

but we're coming out of a lower period. So people are freaking out right now.

So obviously these are just proposals right now.

They're definitely going to affect primarily the middle class and the wealthy,

but what it will do for sure is it'll definitely curb real estate

investing. So next one is a 10 31 tax deferred exchange.

And this is actually a pretty big one. What's going to happen here.

This'll be a massive hit to a lot of brokers.

It'll be a massive hit to a lot of people because a lot of times people like to

trade up. They like to sell something and then trade up.

So here's how a 10 31 works.

It's basically a real estate transaction that allows you to defer taxes

when you exchange like kind businesses, income,

investment property. So that's what that does. And so what it's gonna do,

it's gonna curb real estate investment.

It's going to curb people from selling things.

Here's how this delayed exchange works, essentially.

So when you sell a property, let's say you sell it over here.

Then you actually have 45 days to identify a replacement property.

So that's how it works.

And you can actually identify up to three and then the proceeds from the sale,

they actually go somewhere else. You can't touch them. And then the exchanger,

we actually identify the replacement property.

We use that money as the proceeds to buy the new property.

And all of this has to be done within hundred and 80 days or six months within

the closing date, okay. Of when that property was sold.

So that is essentially how a 10 31 exchange is done.

And if this comes off the block and Biden decides that he wants to

cancel this completely,

then what's going to happen is real estate investment is going to go down

significantly. The third and final thing for the step-up in basis.

So let's say my dad purchased a hundred shares of stock in 1990

at a hundred dollars. And for tax purposes,

obviously it's gone up since that period of time.

My dad unfortunately passes away in 2020 and leaves me the stocks in

2020. The fair market value of the stock let's say is 200.

My basis is now 200.

What they're saying is that I won't get this step up in basis.

I have to go all the way back to what he originally paid.

So now let's look at it in real estate terms.

So my dad purchased a house in 1990 and the basis in the house that means the

full price of the house at the time for tax purposes is a hundred thousand

dollars. And that house has now gone up obviously,

and my dad passes away in 2020 and he leaves the house

to the kids. As an example today, the house is worth $500,000.

So from a tax standpoint,

the step up basis would be 500,000 under the Biden administration.

What they're talking about is making it 100,000.

So you would actually now owe the tax.

The difference between the 500,000 and the 100,000.

So obviously the capital gains,

the 10 31 and the step-up in basis are definitely things that you need to be

watching for. You definitely need to be talking to your estate planner.

You definitely need to be talking to your CPA about how these all might affect

you and potentially even some moves that you can make,

because some of these things might go into effect in 2022.

And some of these moves that you might want to be making should be made,

obviously in 2021, if the new law and if the new policy allows.

So thanks for listening.