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What Will the Proposed Changes to Capital Gains Rates Mean for Real Estate Investors?

By Lea Uradu – Updated Nov 17, 2021 at 5:23PM

Key Points

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The Biden administration has proposed some capital gains tax rate changes that you do not want to miss.

We have been talking about it, and with the Biden Administration, there is a new sheriff in town. With the new sheriff comes a whole lot of tax law changes that will have a major impact on real estate investors. One surprising proposed change is the change to the capital gains tax rates that are part of the proposed Build Back Better Act.

The last time we saw huge changes in the tax code was with the passage of the Tax Cuts and Jobs Act under the Trump administration. Now, the Biden administration has proposed to make some changes to the taxation on capital gains. This could definitely have a huge impact on real estate investors bottom-line! Let's read more to learn about the proposed changes to the taxation on capital gains.

Capital gains tax rates

As a reminder, taxes on capital gains taxes are the gains (increase in income) realized on the sale of a capital asset. I know that is a mouthful so let me break it down a bit more.

When you sell a capital asset -- it could be your home, a fix-and-flip, commercial real estate, a residential rental property, a stock, a bond, or even collectibles (e.g., an old stamp collection) -- for a higher price than what you paid for it, the profit from the sale is included in your income, and Uncle Sam charges you a tax.

Here are the 2021 long-term capital gains tax rates. Remember, if you have short-term capital gains, they are taxed at the ordinary income tax rates.

 

Taxable Income

15% Tax Rate

20% Tax Rate

Filing Status

     

Single

Up to $40,400

$40,401 to $445,850

Over $445, 850

Head of Household

Up to $54,100

$54,101 to $473,750

Over $473,750

Married filing jointly

Up to $80,800

$80,801 to $501,600

Over $501,600

Married filing separately

Up to $40,400

$40,401 to $445,850

Over $445,850

Source: IRS

Couple reviewing document.

Image Source: Getty Images

The rates do not stop there. If you sell small-business stocks or collectibles, the maximum capital gains tax rate is 28%. Additionally, a section 1250 gain, the portion of a gain on a sale that was previously depreciated, is taxed at a maximum rate of 25%. This is of utmost importance for real estate investors. These are the current rules, but the Biden administration has proposed some changes.

Proposed capital gains tax

Under the proposed Build Back Better Act, the top marginal tax rates will jump from 20% to 39.6% That is a steep hike even for the wealthiest among us. In addition to this tax rate increase, the Biden Administration is calling to raise the marginal income tax rates for wealthy Americans from the current rate of 37% to 39.5%.

While Biden proposed tax changes will have some financial implications, with proper tax planning, many individuals will still be able to reduce some or all of their exposure to the capital gains tax.

Some strategies that could potentially be explored are to take advantage of Section 1031 like-kind exchange , the Section 121 exclusion ( primary residence exclusion) or the Section 453 installment sale method to offset or defer capital gains. Additionally, with the proposed increase of the SALT deduction (from $10,000 to $80,000), individuals will have an opportunity to offset more of their capital gains at the state and local level. 

So while capital gains tax rates are on the rise, real estate investors are still in luck. With proper tax planning in advance, investors may be able to defer or offset some or all of their gains!

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