Biden Budget Proposal for PY2024 Includes Roll Back for 1031 exchanges.
President Biden released his official budget proposal including tax plan on March 9, 2023. As expected, he’s taking a run at sharply rolling back 1031s as he did in PY2022.
The President’s budget, Is a proposal, it’s not a law. That’s up to congress. Like all previous budgets it’s a signal to Congress that this is what the administration wants to happen. Congress generally says that a president’s budget is ‘dead on arrival’ as I’m sure they’ll do once again.
The proposed change with the biggest impact to readers of this article is the administration’s attempt to pare back 1031 like-kind exchanges as they did in 2022. The 2022 attempt met with fierce resistance as will this one. The proposal would allow for a total like-kind deferral of gain up to $500,000 for single taxpayers ($1 million for married individuals filing jointly) each year. Gains over that amount would be taxed when the taxpayer transfers the property.
Another controversial tax break is also in the crosshairs again: like-kind exchanges. A like-kind or section 1031 exchange allows investors to delay paying capital gains on the sale of a property as long as the funds are used to immediately buy a similar property elsewhere. The break applies to properties used in a trade or business or for investment. Personal residences are treated differently—you can read about those here. The proposal would allow for a total like-kind deferral of gain up to $500,000 for single taxpayers ($1 million for married individuals filing jointly) each year. Gains over that amount would be taxed when the taxpayer transfers the property.
The proposal would repeal the Tax Cut and Jobs Act rate cute for individuals returning the rate back to 39.6% from the current 37%.
The Net Investment Income Tax, or NIIT, sits at 3.8% and is imposed on certain kinds of passive income—typically investment income—of taxpayers with incomes of $200,000 or more for individuals ($250,000 for married couples filing jointly). The proposal would raise the NIIT rate to 5% for taxpayers making more than $400,000. The increase would also apply to other kinds of income, including pass-through income. The increased revenue would be directed into the Medicare Hospital Insurance trust fund.
The proposed budget also proposes taxing capital gains at the ordinary income tax rates rather than more favorable capital gains rate for taxpayers with more than $1 million in income.
The budget also calls for a Billionaire’s tax, a 25% minimum tax on the top 0.01% of taxpayers. The tax would apply to total income, including unrealized capital gains income, for taxpayers with net wealth greater than $100 million.
The proposal calls for an increase in the corporate income tax rate to 28%—higher than the current rate of 21% but lower than the pre-Tax Cut and Jobs Act 35%. For comparison, the worldwide average statutory corporate income tax rate, measured across 180 jurisdictions, is 23.37%. When weighted by GDP, the average statutory rate is 25.43%. The global effective minimum tax rate will be 15%.
The above are the major proposed changes that would affect real estate investors. I don’t think any of them will pass in any substantive way to cause the fear we experienced in in 2022 over 1031s.