Why It Might Be Time to Sell Your Commercial Real Estate Before December 31, 2020

While the presidential election results are yet to be certified, it seems the next United States president will be Joe Biden as of his inauguration date of January 20, 2021. With a new President comes a new administration, and, perhaps, a new policy that could significantly impact how real estate investors’ capital gains are taxed.

Joe Biden’s tax plan proposes raising the highest long-term capital gains tax rate for taxpayers with taxable income over $1 million from 23.8% to 39.6%. According to Bloomberg, the increase would be the largest hike in the capital gains tax rate in US history. Additionally, he proposes eliminating the step-up in basis provision for capital assets and property transferred at death.

What does this mean for real estate investors? Depending on the passing of legislation, it could be very impactful. There are still two Georgia runoff elections for seats in the US Senate, which will determine the balance of power between the Republican and Democrat parties and could determine whether a President Biden could make his tax policy law. However, whether President Biden decides to tackle tax policy in 2021 (or at all) is up for debate.

The Tax Cuts & Jobs Act of 2017 was the most considerable change in US tax policy since the 1980s. Some practitioners speculate whether there is enough energy on the Hill to pass another significant overhaul just three years later.

Uncertainty also exists as to when any new tax policy would become effective. When the Tax Cuts & Jobs Act of 2017 passed on December 22, 2017, most of the provisions were effective on January 1, 2018, for the 2018 calendar year. Should President-Elect Biden be successful in passing tax policy changes, the effective date and year are uncertain.

If he successfully passes his tax policy, wealthy real estate investors would pay a much higher capital gains rate in future years. The only thing we do know for sure is that the highest long-term capital gains tax rate for 2020 is 23.8% for those in the highest income tax bracket.

Suppose wealthy investors and property owners are considering selling in the next couple of years. In that case, they may want to consider selling their property by December 31, 2020, to ensure they are taxed at lower rates.
These are conversations we are having with our current and prospective clients. Active buyers are looking to close by year-end, so now may be the time to act.