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The American Families Plan And The Real Estate Tax Implications For Investors Using An IRA

August 19, 2021

First, let’s talk about the current law as it stands now with capital gains. If you buy and sell real estate within 12 months, you’re subject to what’s called short-term capital gains.

Short term capital gains currently are just your personal income tax bracket. So that could be as high as 37.5% for some of you high income earners. But if you buy and sell property within 12 months, you have to pay 37.5% short term capital gains.

If you hold property a year and a day or longer, you pay long-term capital gains. And currently that rate is at 20% maximum.
Now, you do have to account for the Medicare tax, which is an additional 3.8%. But currently, if you pay long-term capital gains, at the maximum, you would pay 23.8% not including your state tax.

Now let’s look at the proposed American Families Plan.

How does this affect capital gains? When it comes to long-term capital gains, there’s a proposed increase from 23.8% to 43.4%.
Again, this doesn’t include your state tax and some other taxes that might be included, depending on the state that you live in. If you’re a real estate investor, make sure you look this up and plan ahead accordingly.
For instance, in California, with the state tax and the increase in capital gains tax, you might be paying upwards of 56.7% capital gains when you buy and sell investments.

What can you do?

Now, what is a way to get past this? Avoid it, or eliminate it altogether. It’s by owning real estate inside of an IRA or a 401k.
Self-directed IRAs at NuView allow you to buy and sell real estate.
And by the fundamental rules that IRAs have had since the beginning of time (when IRAs were created back in 1974) you don’t have to pay capital gains tax when buying and selling real estate inside of an IRA.
We as individuals are different. We’re taxpayers. So, it’s not about agreeing or disagreeing with the proposed plan. It’s about what do you do to avoid that increase of taxes?
Real estate is a great investment inside of an IRA. You don’t have to worry about paying capital gains tax.
And we have those types of IRAs that we administrate here at NuView.

1031 Exchange Opportunities

Other things real estate investors should also look at are changes this plan may or may not make to your 1031 exchange opportunities.
A 1031 exchange is what a lot of real estate investors use to defer taxes.
Essentially, this is when you take an investment and sell it to exchange it for like property, and not have to pay the capital gains.
“Swap till you drop” is how a lot of investors like to refer to this.
But in the American Families Plan, they are targeting limiting how much you can defer when it comes to your capital gains.

At the moment, all of this is a proposal. But, with any proposal you want to think ahead about:
• How do I prepare?
• How do I set myself up for success?

This way, if there is an increase in tax, you’re best prepared for it.
At NuView, we think one of the best ways to prepare for an increase of tax is just set yourself up in an account that doesn’t get taxed either way.

When you look at it, IRAs, 401ks, HSAa, ESAs, etc. are all plans that we administrate here at NuView Trust Company, and they can own real estate.
And every single plan you buy and sell real estate inside of at NuView, you’ll never pay capital gains tax on.

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