How The Biden 1031 Exchange and other new tax laws affect your 2021 Taxes !
Updated: Oct 14, 2022
As you probably already know, the deadline to file your taxes with an extension, just passed on October 18th.
Which means it’s time to start thinking about saving some money on your 2022 taxes.
Because it’s one thing to make a lot of money, but what really matters is what you keep after taxes, expenses etc..
It’s your right, as an American, to save as much money on your taxes as possible.
Which means you need to pay attention when tax laws changes are proposed.
Like they were this year.
You may have heard that President Biden’s Economic Plan calls for abolishing the right to defer certain tax payments on property-investment gains of over $500,000 when using the 1031 Exchange Rule.
But you might not know who that affects or why it’s important for your real estate investing career.
So let’s quickly talk about what this change would mean for investors and then we’ll look at two other tax changes that can save you BIG $.
First, what is the 1031 Exchange Rule?
The 1031 Exchange currently allows real estate investors to defer capital gains taxes through “Like Kind Exchanges” (LKEs).
Or in simpler terms you can roll your profits from one deal into another without paying capital gains.
1031 exchanges are important because they allow you to do things like diversify your assets, consolidate multiple properties, and increase depreciation and cash flow.
What is the proposed change for 1031s?
President Biden’s new economic plan calls for abolishing the right to defer certain tax payments on property-investment gains of over $500,000.
These changes will mostly affect individual investors like you.
According to the JCT figures, this year corporations will benefit to the tune of $2.3 billion while individuals will gain $5.7 billion.
But there is some good news…
First, it’s still just a proposal.
Second, even if the law changes it will only affect those tax payments on property investments OVER $500,000 so any deal under that will not be affected EVEN if the law changes.
Regardless you should keep an eye on what happens with the 1031 Exchange Law over the next few years as budgets get approved and plans get passed.
What OTHER changes should you know about for taxes in 2022?
CARES Act Accelerated Depreciation
California’s Proposition 19
Under the CARES Act, you can drop QIP (qualified improvement property) depreciation improvements from 39 years to 15 years. This gives you over double the tax benefits when you do fix and flip type deals with QIPs!
Don’t miss out on this awesome new benefit!
Proposition 19 is a property tax increase in California that greatly limits the scope of the parent-child exclusion for increases in property taxes. Beginning February 16, 2021, Prop 19 limits the parent-child and grandparent-grandchild exclusions to transfers of a primary residence that will be used as the recipient’s primary residence or of a “family farm.”
If the fair market value of the property (whether a primary residence or family farm) at the time of transfer is less than $1 million greater than its assessed value, the property will retain its original assessed value.
If the property is worth over $1 million more than its assessed value, the property will be reassessed, but $1 million will be excluded from reassessment.
This is an interesting change for investors because it means you can’t pass down a portfolio of properties tax-free, which combined with the proposed changes to the 1031 Exchange could mean a big tax bill for families down the road.
While this proposition currently applies only to California, it may be adopted by other states in the coming years as California often leads the adoption of new laws nationally. Something to keep an eye on.
So that’s a quick rundown of the 3 MOST important tax changes you need to keep in mind as an Investor! And make sure that you start getting all those documents together to save as much cash as possible in 2022!