Tax Reform News Alert: Biden Administration Proposes to Retroactively Raise Capital Gains Taxes

Updated June 1, 2021

A Potential Retroactive Hike on Capital Gains Tax Rates?

On May 28th, 2021, the United States Department of the Treasury published the “Greenbook” for the Biden Administration Budget Plan. The Treasury Greenbook is a summary explanation of an Administration’s Revenue Proposals for the upcoming fiscal year and beyond. The 2022 Greenbook indicates that the proposed capital gains tax increase as part of the American Families Plan would be retroactive to late April 2021, the date of the Plan’s announcement. Our Team is monitoring new developments as some of the tax proposals in the Greenbook are unclear.

What is the proposed rate hike on Capital Gains?

“A 39.6 percent rate on all income for the wealthiest Americans.”– if passed, this would raise the marginal ordinary income tax rate from 37% to 39.6%. Additionally, this same rate, plus the 3.8% Net Investment Income Tax, would be used as the capital gains tax rate for taxpayers with earnings of $1M or more. These combined taxes would raise the capital gains tax rate to 43.4% for the sale of real estate or other appreciated investment assets for those certain taxpayers.

Read the official White House Fact sheet here.

What is the likelihood of a retroactive increase?

The Administration’s Plan is only in the proposal stage right now and has not passed Congress. Accordingly, no changes have been made to the Tax Code. Historically, when changes are made to the Tax Code, they have an effective date starting in the next tax year. That being said, there is a precedence for making retroactive capital gains tax rate changes, but in the last 25 years all retroactive changes have reduced the effective rate. A reduction is an unforeseen benefit for a taxpayer, and thus far easier to manage, than an unforeseen tax increase. If this proposed rate hike does pass Congress, it might not get the support needed for it to take effect immediately or retroactively.


What are the proposed limits to 1031 Exchanges?

The Biden Administration has also proposed limiting the gain deferral of IRC §1031 to $500,000 of capital gains tax per taxpayer or $1,000,000 for married couples, per year. The Greenbook indicates that this cap on deferred gain would be effective for exchanges “completed” after December 31, 2021.

What Can You Do? Send a letter to Congress  An updated email is available for you to send to your members of Congress urging them to preserve Section 1031. You can access the letter on the take action page of the website along with other resources supporting Section 1031.

Write Congress through the FEA

The American Families Plan: A Problematic Proposal for Real Estate Investors

The Political Path to Repeal of 1031

A 1031 Exchange isn’t a Loophole

Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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