EP 010 - What Biden's Presidency Means for Your Taxes

In this webinar,  let's talk about how Biden's presidency may impact your taxes if you are a business owner or real estate investor.

Transcript

SPEAKER_00 0:00

All right, welcome everybody. So uh thanks for tuning in. And today's topic is how Biden's what Biden's presidency means for your taxes. Now, this is going to be a really challenging topic to cover because there are so many different things that we could touch on, different elements of the tax code that may be impacted by Biden. We also haven't gotten incredibly clear guidance on exactly what they want to do in every area of the tax plan. I'll go over some of the areas and how perhaps how certain we are based on the analysis and in the documentation I've reviewed for this webinar. And also, obviously, this is we're going to be analyzing Joe Biden's tax plan. How much of this is going to go through is really anybody's guess at this point. We know that it has to, you know, based on uh you know what's going to happen in the races and the House of Representative Senates and all these different variables and different compromises that may take place. But it's a good time to at least think about some things that may uh may impact you and your taxes if you are a business owner or a real estate investor. So what we're gonna do is we're gonna go through um some potential challenges, some potential opportunities, and some things that we may be thinking about in the future for tax planning. So this is you should guide if you guys are CPAs listening, this might give you some ideas when when your clients are coming to you and asking what to do about potential um liabilities for capital gains and other things. Uh, we're gonna talk about some strategies we may implement as we see potential changes in our tax code. So let me pull up my slide and we can get going on some of these slides. My PowerPoint. So as I go through this, you know, feel free to put some questions into the chat. And once I've gone through the slides, I'll read through all the questions and ask and address them as best I can. Again, there's only so much that we can do right now to anticipate potential changes in the tax code. Uh, because uh there's just so much unknown, but but now is a good time at least to start thinking about this and being being aware about things in the long term. So, as I said earlier, we're gonna talk about potential challenges, possibly we're gonna talk about maybe what could be the worst of the worst under Joe Biden's tax plan. Uh, so keeping it positive, we're calling them potential challenges, potential opportunities. So, even with these tax changes uh and potential increased liabilities, there may be opportunities for you real estate investors, and I will go into those as well. And then possible tax planning opportunities. Again, we keep because nothing is set in stone yet, uh, and we don't even know when these bills may pass. Uh there's a lot unknown, but we could talk about some of the things that I will be working on with my clients on now and in future years in anticipation and reaction to potential to different uh tax legislation uh aligned with Joe Biden's tax fund. So, potential challenges that we're gonna see are increases in Social Security taxes for income over$400,000. So, as of right now, if you're an employee or self-employed, if you have active income, so not rental income, but active income as a real estate agent or maybe you're a general contractor or you're a salaried employee, as of right now, you pay uh 15.3%. So uh payroll taxes comes out of your paycheck and addition to your federal and state taxes. Uh, 12.3% of that is Social Security and goes away after you have paid that tax on your first$137,700 for 2020. Anything beyond that, you're just paying taxes on an increased Medicare tax of 3.8. But what's gonna happen under this plan, if it goes through, is once you start making over$400,000, the that 12.4% Social Security tax is gonna come back and hit you again uh on on top of your your state taxes and your federal taxes being taxed at the higher marginal rate. So that that could be pretty painful for some of you high income earners. Um, and uh you know you we gotta consider the fact that once you jump into that higher tax bracket, you're also you know paying higher federal taxes. Only right now, only half of your social your payroll taxes are deductible against your federal taxes. So you could potentially be paying um more than 50% of your income uh can be going to taxes at those higher marginal brackets. So that could be pretty tough. Um another thing that we want to think about is uh increasing there there are going to be some increases on uh capital gains tax, right? So that you're right now um you know the capital gains rates are 15 either 15 or 20 percent. Uh in addition, you could have potential net investment income tax on top of that. So that's 3.8% on top of those amounts, depending on uh what your income tax level is. Um, you know, if your income is over a million dollars, then you will be taxed at your marginal rate on your capital gains. So uh that can be pretty substantial for some of you guys. Uh, also on top of that, if it's treated like there, some of the analysts are saying that we are gonna treat this as ordinary income, and therefore uh we also may be subject to some um additional payroll taxes. Some analysts are saying that we're gonna pay that, you know, we're still gonna have that net investment income tax on top of your marginal rate. So it can get really, really high up there um for capital gains rates. Uh I don't really have the clear specifics, but if you are a high income earner, uh these tie the the your capital gains taxes can can be pretty painful in the future. Elimination of the step up basis. The step up basis, when we're talking about that, is uh you have a depreciable basis for your real estate over time, you have that depreciable write-off, and your depreciable basis, the basis of your building on your books, will diminish over time. To give you an example, I buy a property for$1 million. We let's say the building is worth one million dollars, and that is depreciating over time after 27.5 years. Let's say it's worth uh we fully depreciated, and it that building is down to a zero dollar value. Um, and then if I pass away and pass it to my heirs, the heirs get the building at the fair market value. So let's say that building is worth five million dollars of heirs, we'll inherit that building and it will have that increased basis, and they can begin depreciating it all over again. And that depreciation may offset any income from that property through the life of my heirs um investing um or ownership of that asset. So the uh so Biden's tax plan is saying, hey, you know, this is just a little bit unfair because you're never paying taxes on it, and then it's gonna be passed down to future generations, and they're gonna see the benefits of depreciation all over again. There's no taxes on the increased gain, uh, and yet we're gonna have we're bringing the basis of it's a major loophole for creating generational wealth. Well, that may go away under Biden. Um, another topic, another area that we see is the top in individual tax rate could increase to back up to 39.6 for individuals making over$400,000 a year. Uh now that that one as well, uh, you know, these are all speculative, but for some of you high income earners, this will obviously impact your taxes as well. Removal of real estate tax breaks. This has been something that they've said, but they haven't been incredibly specific on. Um, I skipped one, we'll go back. Uh so one of the things, and I really hope that we can keep this privilege is the$25,000 passive activity loss exemption. What that is, is normally you cannot use passive losses from your long-term real estate to offset your ordinary income from your day job. Um, but if your income is below$100,000, you can take$25,000 of passive losses and use that to offset your active income from your job. So this is a fantastic opportunity for some of you newer investors who are just getting started to create some write-offs after you've invested all of your money into these rental properties, and those write-offs can help you reduce your taxes and reinvest and buy more property. That could potentially go away. Um, some other things they're talking about going away are the ability to accelerate portions of uh the depreciation on portions of real estate. Bonus depreciation is already set to be phased out by 2026. Uh, it may they may eliminate that sooner or um maybe make it more challenging for us to recognize bonus depreciation on some items with real estate. We haven't been provided specific guidance on what exactly that means. Uh I skipped one that is incredibly important that everybody is talking about, which is the uh elimination of the 1031 exchange. Now, some of you may know that is our ability to defer capital gains tax and depreciation recapture tax when we sell property by instead of just selling it outright for a profit, we sell it and we purchase another property of equal or greater value. Now, that 1031 exchange um is something that a lot of people are talking about that may go away. Uh, so that one could could really uh that's gonna probably be one of the most talked-about topics um for the next the next months or or or years when when people are discussing tax legislation. Um, and also Biden has uh he has stated that he's he's he's interested in undoing the Tax Cut and Jobs Act. So some of the privileges we have for that are the 20% qualified business income deduction, uh, which is really uh tremendous benefit for some of you guys, especially real estate agents and people starting off on your own who are sole proprietors uh and partners, and even S-corps somewhat. Uh that really encourages people to uh to start their own businesses and have their own trade or craft with the 20% qualified business income deduction. Now, that incentive may go away a little sooner than we anticipated. Um, but let's think about this. What's something that most of you guys did not like about the Tax Cut and Jobs Act? Well, we're gonna talk about that in a little bit, but there are some there were some elements of the Tax Cut and Jobs Act that actually caused some people to pay some more in taxes. So in the next slide, we're gonna talk about some new opportunities that may open because of Biden's presidency and potentially new tax legislation. Potential opportunities. So with the Tax Cut and Jobs Act, as we were talking talking about earlier, you're only able to deduct$10,000 of your state and local taxes against federal taxes. If we repeal or modify this uh this tax cut and jobs act, it's possible that we can get more of these salt uh taxes uh as a deduction against our federal income taxes. Also, we uh may be able to deduct more of our mortgage interest expense. There's a limit right now, that limit will increase. Uh another thing that they're talking about is first-time home buyer credits increasing up to well, they're gonna bring it back, and and there's discussion of having a$15,000 first-time home buyer credit. So for some of you real estate agents out there doing residential, this is an opportunity now to have a maybe a larger client base, and maybe with new home buyers entering the market, that'll bring the prices up. Maybe some of you guys looking to get your first property under your belt and looking to house hat. Maybe here's your chance to get that seed money for your first owner-occupied loan that can turn into eventually being your um your first rental property. Also, uh Biden has discussed increasing the incentives that are created through the new market in the low-income housing credit. So these housing credits, without going too deep into the uh the specifics, uh, these housing credits are incentives to develop new housing in areas where there is maybe a shortage of quality housing. So, based on certain criteria, uh for instance, with the new market and low income, you're typically looking for areas that need to be developed that need better quality housing. Uh, and you can get substantial amounts of tax credits for developments, um, where the government's these tax credits can be utilized to finance the construction and development of these properties. Uh, if you want to talk about an opportunity to have astronomical cash-on-cash return for your investments, um, these housing credits can be really powerful. Okay, so let's talk about some possible planning opportunities. So, as you know, I'm thinking a little bit ahead of time here, um, but with some of the things that we discussed, here are the things that we want to think about. Uh, we may be thinking about as far as planning for potential changes in the tax code. Well, if we lose that step up basis, how else can we create that tax-free that generational wealth? Or if we're worrying about, especially let's think about, let me go backtrack and talk about capital gains real quick. So, if we're anticipating capital gains on the disposition of our properties, uh, and we want to have a long-term plan to have income that comes out tax-free. Let's start thinking about self-directed accounts. So, you can invest with your self-directed Roth IRA. That income, uh, that as you begin to pay off the mortgage in that property, you you have something called unrelated debt finance income that will diminish over time. If you fully own this property with no mortgage, when you sell it, the capital gains tax within that Roth IRA will be completely tax free. So here it's so here's a way to uh bypass all of these challenges with um potential increases in capital gains tax and elimination of the 1031 exchange. Also consider one of the methods that we can create because we're anticipating our tax liabilities increasing if we lose our QBI deductions and the rates go up. Uh, utilize life insurance policies are one of the ways that people may put some money aside to build wealth in a tax-free uh device, just like the Roth IRA. Uh, obviously, you got to pay fees to manage that, but that is another method where we're anticipating our tax liabilities against future earnings to increase. Uh, this is a way that we could pull money out from current savings, have it grow tax-free. Now, another thing that we can do when it comes to capital gains planning are well, there's quite a few strategies, but some of them are just timing your sales. So, for instance, let's say you anticipate jumping into that higher tax bracket next year where your capital gains rates will increase. You may want to sell that property now, or maybe you want to time certain things and in time certain dispositions so we can minimize our capital gains. Also, installment sales, so we can recognize those capital gains over time if we sell things in via installment sale when we're pretty much the owner finance on this, owner financing the sales of these transactions. We can also pull money out of properties through refinancing, right? So let's say our property has doubled in value and we want we need some cash instead of just selling it or and or 1031ing it, another way that we can obtain capital and have greater liquidity from the increased value of our properties is through uh through refinancing and taking out a loan on the equity of your property. And we can start doing 1031s now. So if you are thinking about doing a 1031 in the next, you know, now in the next year, now might be a good time to start thinking about this and maybe taking action if you have a plan in place and you know what kind of properties you want to place it at, the market rate is pretty good. 1031 might make a lot of sense now. Uh what we may see if the 1031 goes away, we might see this uh we might see this land grab for lots of people trying to get rid of their pro their investment properties before that time runs up. I really don't know what it's gonna look like. Um, another opportunity here is more cost segregation. I talk about cost segregation all the time. It's our ability to isolate different parts of our real estate and property and classify them as personal property, things such as the cabinets, furnishers, and fixtures, and depreciate them faster. Even if we lose our bonus depreciation, the cost segregation studies will still be valuable. Also, consider the fact if we do not 1031 exchange our properties on the dispositions, if we just sell them regularly and pay those capital gains tax, sure we're gonna pay more taxes. But the new properties, if we buy new properties, instead of 1031ing them, we're gonna have higher basis because we're not deferring the gains, which reduces our basis. When we have a higher depreciable basis, we will see greater benefits from cost segregation. So even if we lose our bonus depreciation, cost segregation is a fantastic way to minimize or eliminate our tax burden from our investments or other sources of income. The last topic I wanted to cover is just take advantage of the Tax Cut and Jobs Act now, right? So a lot of us knew this coming in when you looked at historically what the tax code has looked like for our country. We are in a time where there are so many fantastic incentives for you to go out on your own and to develop your business with this qualified business income deduction and the bonus depreciation. There are so many tax benefits that it you you gotta at least consider if you're thinking about starting a project or going out on your own. Uh, right now, when you think about all the write-offs we can create as business owners and investors, um, we really want to make sure that we're aware of all these opportunities that might go away and enjoy it while we can. Uh, because even without Joe Biden, that's a lot of pretty much the Tax Cut and Jobs Act, all of it was going to be sunsetting in 2026, anyways. We were gonna have that bonus depreciation get phased out, anyways. So why not while we can? And we're young and we're hungry and we're we're developing our businesses. Be aware and take advantage of all these incentives to invest in in your endeavors while you still can. Uh, because in the future, hopefully, you will see the benefits and the rewards from from your prior investments and and all the entrepreneurship that this bill encouraged, and you'll be able to take that tax hit if and when it comes. So let's do what we can now and be aware of all the tax incentives and benefits um for real estate investors and business owners. So I'm going to open up now for questions. Uh and I'm gonna stop sharing my screen. So put your questions in the chat. Let's see what we got here. Right, so 1031 exchanges would uh those being eliminated would be really hard for business owners. Um because especially if if if um it's necessary for you to maybe especially for certain businesses where it's necessary for you to acquire new land and replace net land. Well, the 1031 exchange was developed about 100 years ago, um, and it was it was really meant for farmers when they needed to exchange for new farmland, so they didn't have to incur that capital gains tax. So um, and a lot of people are predicting uh that with the 1031 exchange, it's it's gonna make uh it's going to hurt the real estate market because with the 1031 exchange, you have more capital to leverage into larger and bigger. Properties and grow your your real estate portfolios or whatever business endeavors faster. If we lose that 1031 exchange, um there's going to be less of a demand for real estate. The number of transactions may decline as a result of the 1031. Um, so it looks like we don't have too many questions right now. Um, I want to tell you guys about my next webinar that is going to be on Thursday, December 17th at 1 p.m. We are going to discuss tax and investment strategies for real estate agents. So this is if you or anyone you know as a real estate agent who's interested in investing as well, we're gonna discuss about how you can leverage the uh the real estate professional tax status and your credentials as a real estate agent to thrive and save money in real estate uh investing and reduce your overall taxes. Uh, so that's gonna be on December 17th, and we're gonna talk about things along the lines of entity structures and yes corp utilization and certain tax traps that may come along the way as well. So if you or someone you know is interested, you can send them the link. I'll shoot you the link as well to everyone attending and on my my mailing list. Um, also, as you know, I do provide the uh a free discovery session. If you're curious, if you need a tax plan or or you think you might be overpaying in your taxes, you know, you can shoot me an email and we'll set something up where we can look through your prior returns and see what you're doing and see if there are any missed opportunities or future opportunities so we can create a tax plan and reduce your overall taxes. Well, it looks like right now we don't have a whole lot of questions. I hope you guys got something out of this. I'm sorry for the vagueness. That's the best information I got right now on what's going to happen to our tax code. When these bills come out, I will be sending newsletters and doing webinars on what what everything means and what we should be doing to plan for this to best set us up, set us up for success. Right now, we we there's just the dust needs to settle a little bit more. Another thing we want to think about is Biden has at least stated that his priority right now is first taking care of the coronavirus. So um, if you if if what we believe is that his first initiative will be to implement more testing stations, have more readily available tests, and get this this coronavirus under control and bring our society back to a normal state, um, that should be prioritized uh over increasing taxes and issuing these these new changes in our tax code. So uh we should have some time. And um 2020 and 2021, at least we should still see tons of benefits, and we will be ready for whatever changes take place. You know, let's stay in touch. If you have any questions, I'd love to be a resource for you. I will fill you in on everything you need to know. I hope you guys enjoyed this webinar and you found it useful. We will stay in touch. Thanks for your time. And let's keep let's keep in touch. And uh, I'm about to sign out, so I hope you guys all enjoy yourself.