Capital Gains Tax - Question and Biden

06 May 2021, 11:24 AM

So, I understand Biden is proposing to change the rules on capital gains taxes to sock it to the "investor class".

A person, let's call her Tori, lives in a house she owns free and clear. Tori's parents bought the house in the 1970s and she inherited it, as luck would have it, at the bottom of the market about ten years ago. At the time she inherited it, the house was appraised at $375K. Comps in her neighborhood are now selling for well over $1.5M. Over the last ten years, she has been planning to sell, so she has not put any money into upgrades and only basic maintenance (if that), since the house will be torn down to build a McMansion.

So, she will realize a gain of well over a million.

Currently, long term capital gains tax is capped at 20%. She has heard that Biden wants to raise that to 39%.

She planned to buy a home in a much cooler market and is looking to spend about $400K on a new house and planned to use the remainder to live on for several years.

So, is she gonna get soaked? Should she hurry up and sell before Biden jacks her up? Are there any things she can do to shelter the money from an almost 40% tax hit?

Asking for a friend.

06 May 2021, 11:44 AM

piqué

I can't answer Tori's questions. What I want to know is, where is this cooler market where Tori can buy a house for only $400k?

06 May 2021, 11:46 AM

piqué

quote:
So, is she gonna get soaked? Should she hurry up and sell before Biden jacks her up? Are there any things she can do to shelter the money from an almost 40% tax hit?

Tori should ask her accountant these questions.

06 May 2021, 12:07 PM

Steve Miller

The way things stand now, and assuming this is Tori's personal residence, she can exempt the first $250K of gain from capital gains tax. If she's part of a couple they can exempt the first $500K.

If the house is a rental, the only way around capital gains tax is a 1031 exchange, which may or may not survive in the next tax package. I have heard of people converting their house in to a rental for a period of time prior to sale but I don't know that works, exactly. Tori would definitely need a tax accountant to advise her.

Again, as things stand now, you can take the exemption once every two years, and I know at least one couple that made a lateral move in the same neighborhood when their equity started hitting the $500K mark. I don't know if that provision will survive in the next tax package either.

One thing to look at is whether or not Tori's state has a capital gains tax. I was recently surprised to learn that CA does. State rules will be different (1031 Exchanges don't help in CA) and it will be useful to look in to them as well.

06 May 2021, 12:15 PM

QuirtEvans

The other factor is that Biden may try to make the capital gains change effective for 2021. (And I thought it was up to something like 43%.)

06 May 2021, 12:18 PM

Steve Miller

If I were in Tori's situation (and I am, although not to the extent she is), I would look in to either selling right away or making her house in to a rental for a few years if her tax account says that's legit.

If Biden's proposal goes through it will be interesting to see what happens to the housing market. I can easily envision a scenario where there is a glut of $million homes on the market driving down prices.

06 May 2021, 12:28 PM

Steve Miller

quote:
Originally posted by QuirtEvans:
The other factor is that Biden may try to make the capital gains change effective for 2021. (And I thought it was up to something like 43%.)

I've heard that as well.

I find it disappointing that he's decided to go after the only real way a working guy has to save up money for retirement. Yes, I have a dog in the fight, but the exemption amounts haven't been raised since 1997 and it's long overdue.

This is a really blunt instrument and will wipe out a big chunk the savings held by a lot of middle class (as opposed to "investment class", whatever that is) families. It also hits blue states disproportionately, and at the same time the Trump cuts wiped out deductions for state and local taxes.

If he wants to make sure Democrats lose everything in 2022, this would be a good way to do it.

06 May 2021, 12:41 PM

Steve Miller

quote:
Originally posted by piqué:
I can't answer Tori's questions. What I want to know is, where is this cooler market where Tori can buy a house for only $400k?

Phoenix is one, especially the 'burbs. NW Ohio is another. Other smaller cities offer very nice new houses for $400K or less, in some cases much less.

06 May 2021, 12:42 PM

wtg

Tori might want to read this in preparation for talking to her accountant:

https://www.jdsupra.com/legaln...ispositions-5438064/

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We are all visitors to this time, this place. We are just passing through. Our purpose here is to observe, to learn, to grow, to love… and then we return home. - Australian Aboriginal proverb

Bazootiehead-in-training

06 May 2021, 12:48 PM

Steve Miller

Houses non withstanding, I think the proposal is mainly aimed at investments in stocks and such. It's still not fair to people who dutifully fed their 401K accounts over the years (not easy to do, especially if you didn't work for an employer who offered matching), and are now looking at a big chunk of their savings being wiped out. This is particularly true if it's retroactive to January.

If this comes about the reaction of the stock market will not be pretty, IMHO. Perhaps Piano*Dad will weigh in here.

06 May 2021, 12:53 PM

Axtremus

The threshold for higher capital gains tax rate is $1 million.
If the gains below $1 million is taxed at current rates, and only the gains in excess of $1 million is taxes at the higher rate, that's still leaves ample room for the middle class to advance their lot.

Certainly raise the threshold if you think $1 million is "too low."

If you want to "tax the rich," then tax the rich. One does not get to relabel oneself as "not rich" just because one holds one's wealth in real estate as opposed to stocks and bonds or collectibles.

06 May 2021, 01:04 PM

Steve Miller

quote:
Originally posted by wtg:
Tori might want to read this in preparation for talking to her accountant:

https://www.jdsupra.com/legaln...ispositions-5438064/

That's a very good article - one of the best I've seen. I've bookmarked the site.

Thanks!

06 May 2021, 01:06 PM

Steve Miller

quote:
Originally posted by Axtremus:
If you want to "tax the rich," then tax the rich. One does not get to relabel oneself as "not rich" just because one holds one's wealth in real estate as opposed to stocks and bonds or collectibles.

It's going to hit a lot of 401K accounts too, probably harder than real estate.

06 May 2021, 01:29 PM

big al

Explain to me how it will hit 401K accounts. I thought all distributions from those accounts were taxed as ordinary income, not capital gains.

Big Al

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Money seems to buy the most happiness when you give it away.

Why does everything have to be so complicated, all in the name of convenience. -ShiroKuro

A lifetime of experience will change a person. If it doesn't, then you're already dead inside. -MarkJ

06 May 2021, 01:35 PM

Steve Miller

quote:
Originally posted by big al:
Explain to me how it will hit 401K accounts. I thought all distributions from those accounts were taxed as ordinary income, not capital gains.

Big Al

I didn't know that - I've never had one.

Correct my statement to include stocks, etc. held outside of 401K accounts.