Federal, state, and municipal governments have all amassed substantial amounts of debt, which amounts to nothing more than accelerated revenue. Some academics predict that the government debt will reach $50 trillion by 2030, from its current level of more than $27 trillion. The Democratic Party and the Republican Party disagree on the best approach to this issue. If Republicans win in November, it will be business as usual in terms of tax legislation. However, democratic victory in the forthcoming elections holds usher in a wave of reforms with far-reaching consequences.
Taxes are expected to rise for anyone with annual incomes above $400,000. Increases in corporation taxes, limits on itemized deductions, and the elimination of the initial 20% deduction for qualifying business income are all possibilities.
The three most crucial suggestions made to real estate investors are as follows:
- It is eliminating the step-up in basis for inherited assets, which would result in higher taxes on the wealth passed down to heirs, and reducing the exemption amount for the federal estate tax from $11.58 million to somewhere around $5 million.
- All taxpayers with annual incomes over $1 million will no longer be eligible for a capital gains tax benefit. Joe Biden, the Democratic Party’s presidential nominee, has advocated raising the top income tax rate from 23.8% to 39.6% if this is ever the greatest rise in effective taxes.
- If implemented your yearly income is over $400,000, you cannot participate in a Section 1031 “like-kind” exchange.
A Legislative Path Forward?
Is there a chance that they will enact these ideas into law? First, let’s check the polls to determine where each candidate is and how likely Biden will be elected. The Real Clear Politics national average poll is my go-to since it averages the results of many national polls and has a sizable sample size. Biden has a 51.3 on the RCP national average, while Trump has a 42.4.
An eleven-point lead for Biden has been recorded in the most recent survey conducted by the Wall Street Journal and NBC. Incredibly, Hillary Clinton led Trump by five points in this poll four years ago.
The IBD/TIPP poll conducted by Investor’s Business Daily claims to be “America’s most accurate national poll” and was among the few that were correct in 2016. Biden has a 49-44 advantage over Trump.
That’s a survey of opinions from three outlets, and they all add up to the same result. It would be best if you kept in mind that Vice President Biden would need a Democratic majority in Congress to make significant changes to your taxes.
Possibilities of a Complete Democratic Victory
Let us try to make some forecasts about the upcoming elections for Congress. The probabilities of Biden becoming president will also be revealed.
I plan to use information from a prediction market to determine these odds. These exchange-traded markets aim to facilitate trading in the outcomes of various events, including elections and sporting competitions. As the futures’ prices rise or fall, they reveal the likelihood of an occurrence. For instance, if a contract is trading at $0.25, it means there is a 25% chance that player X will win the match.
In the United States, you should know that partner gambling is illegal. However, the Iowa Electronic Markets are an important exception because the University of Iowa operates them with the blessing of the Commodity Futures Trading Commission. PredictIt, run by the University of Victoria in Wellington under a similar no-action letter, is another option.
As of this writing, the following are the most up-to-date markets on PredictIt for the 2020 presidential election:
White House
101.7M shares traded
Biden @ $0.63
Trump @ $0.41
Senate
1.2M shares traded
D win Senate @ $0.60
R win Senate @ $0.42
House
1.6M shares traded
D control House @ $0.85
R control House @ $0.17
Let’s calculate the probabilities of a blue wave sweeping over Washington, D.C.
0.63 x 0.60 x 0.85 = 0.32
Markets on PredictIt give the Democrats a 32% likelihood of winning the elections.
Potential Alterations to Qualified Opportunity Zones
The Qualified Opportunity Zone (QOZ) program and Opportunity Zones were established by the Tax Cuts and Jobs Act of 2017, which aimed to encourage investment in economically depressed areas. It’s also possible to alter the laws that regulate opportunity zones. While Democrats seek to change the program’s rules, Republicans plan to expand it.
With a Democratic majority in place, the QOZ program is anticipated to undergo these four rule changes:
Rule #1: Promote collaboration with local groups by offering financial incentives.
Rule #2: Appoint the Treasury Department to examine current rules and check that any tax breaks help the community economically, socially, and environmentally.
Rule #3: Developers should be obligated to offer comprehensive reporting and public transparency regarding their financial investments.
Rule #4: The results of the 2020 census should be factored into a review of the QOZ map.
Many urban areas have seen significant transformations since the QOZ maps were created using census data from 2010. Much of today’s QOZ funding is going to areas that are not economically challenged since they have already transitioned. The Democratic Party sees the tax benefit as little more than a handout. Sponsors are compelled to build in more desirable places since investors only get a tax benefit if the project is successful as the legislation stands. There is no doubt that the program is increasing employment, but it is failing to deliver on its promised social benefits. Although these reforms make a lot of sense, they will make it more difficult for many funds to operate, reducing the number of investment alternatives available to the public.
When a Sweep Occurs, What Arises?
If the blue wave occurs on election night, you may consider how to dispose of your estate’s assets before changing the rules. With the Democrats unlikely to make any changes to the statute that would go into effect retroactively, an heir’s inheritance of up to $11.58 million would be exempt from taxation for the rest of 2020.
You might want to explore these two gifting techniques if you want to make the most of the exemption:
- Setting up a trust to allow for the transfer of wealth to heirs.
- Getting rid of possessions by giving them to a family member or a trust.
Suppose you anticipate an increase in your tax liability. In that case, you may consider selling any investments that have generated capital gains or converting existing regular IRAs into Roth IRAs.
As a rule, this is not a good idea to act hastily, and we may soon find ourselves in a situation where we’ll never have another chance to take advantage of the incredibly beneficial tax climate we’re currently experiencing. There are numerous possible outcomes to the elections, and the measures currently on the table could go through several changes before becoming law.
When the capital gains tax is raised, it may be prudent to consider transferring appreciated real estate assets into a QOZ fund. Getting rid of the need for 1031 exchanges could make this an even better deal. However, Section 1031 exchanges have been around since they first drafted the tax code in 1921. Most MPs support maintaining the law because they recognize its beneficial economic effects.
No matter who wins the election, investment firms are confident in the continued long-term growth of the private real estate market. High absolute gains in this asset class should be possible for you beyond the 2020 elections.
We are committed to investing in high-quality real estate in rapidly developing markets while minimizing tax liability. No matter who wins the elections, they remain certain that high-growth cities in tax-friendly states are the greatest places to invest.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.