It’s official! Donald Trump will be the next President of the United States.
Half of America sat in shock and awe last night as votes for Donald Trump swept the country. It turns out he was right, and the pollsters and the mainstream media were wrong.
Trump’s message appealed to working class – the new angry mob who’s tired of the power elite taking jobs and revenues offshore and not paying taxes here in the U.S. Those voters turned out bigly! They believe he is the one who can change things – which is interesting considering he’s technically part of the power elite.
Even though Donald Trump is pro-business and pro-real estate, global stock markets were shaken up this morning. Mexico’s currency tanked, and US stocks were volatile.
The financial markets don’t like uncertainty, and nothing is more uncertain right now. Trump has no history in politics, did not seem to understand all the issues during his campaign, and is unpredictable in general as a person. His vow to dismantle trade agreements has our trade partners on edge.
However, Russia’s stock market is actually rising. Investors seem to be hopeful that Trump and Russian President Vladimir Putin will get along. On the flip side, Gold surged after the election as investors fled to the safety of hard assets.
How could a Trump presidency affect real estate?
Whether you like Trump or not, it’s likely that his policies will be good for the U.S. real estate market. He certainly has a lot at stake in that department!
It’s likely that Trump will reverse some of President Obama’s proposals to reduce the traditional tax benefits enjoyed by real estate investors. These include:
Capital Gains Taxes
Obama had proposed increasing the top capital gains tax rate from 20% to 28%. Many real estate investors in the top tax bracket face an additional 3.8% tax on Net Investment Income, so their total capital gain tax rate is 23.8%. Under Obama’s proposal, this would increase to 31.8%.
Trump has stated he will likely not change the current capital gains rate, but would reduce corporate tax rates from 35% to 15%.
Trump will not likely increase capital gain taxes, especially now that he has the support of a Republican Congress.
Stepped up Basis on Inherited Property
Additionally, President Obama had proposed to eliminate the stepped up basis at death. Currently, when an heir inherits a property, the value of that property is “stepped” up to current fair market value. The heir then doesn’t have to pay capital gains on that property.
For example, let’s say you inherited your parent’s home that they had purchased originally for $200,000. Upon their death, let’s say it was worth $500,000. Today’s tax law would allow that property’s tax basis to be “stepped up” to current market value. Capital gains tax on the $300,000 gain would be waived.
President Obama’s proposal would have eliminated that stepped-up basis, which means the inheritance would be treated more like a sale. You as the heir would have to pay capital gains on that $300,000 profit. President Obama did propose some exclusions – specifically $200,000 on general asset gains and $500,000 for a taxpayer’s primary residence.
So if that inherited property wasn’t a primary residence, you’d pay $15,000 to $24,000 in capital gains tax, depending on your tax bracket. That could be difficult to pay if you don’t have the money, and can’t sell the home to access the cash.
But don’t worry. This proposal will likely die under a Trump administration.
President Obama also wanted to limit the deferral of capital gains during a 1031 exchange to $1 million per taxpayer per year.
Currently, the 1031 rules are such that if you sell a property, but buy a replacement property of the same value or more within a given time period, you are able to defer the capital gains tax until you sell the replacement property. And if you never sell that replacement property, you never pay that gain. Or if you sell the replacement property and exchange it again for another property of “like-kind” you get to defer it again.
When you die and your heirs inherit that property, as I already mentioned, the value of that property steps up to current market value on the day you died. Your heirs would not have to pay the capital gain because of the new basis.
This is one of the best tax benefits for real estate investors. And as I said, President Obama was proposing to limit such 1031 exchanges to $1 million dollars per year per taxpayer.
But with a Republican congress and a President who fully understands and utilizes these tax benefits, it’s likely all these proposals will end up in the trash.
Self Directed IRA’s
Finally, Senator Ron Wyden, a democrat from Oregon, proposed the RISE Act – which is basically a direct assault on self-directed IRA’s. I interviewed Tax Attorney and accountant, John Hyre on my other podcast, The Real Wealth Show. Check that out. But no need to worry now.
Senator Wyden won’t likely get support from a Trump Administration. It’s more likely that proposal would get yanked and tossed like a lousy teleprompter.
So if you’re like me, and others who are totally opposed to Trump’s social behavior, you can find comfort in the tax benefits you’re likely to receive over the next four years, especially if you’re a real estate investor, business owner or high net worth individual. Then you’ll have extra money to donate to social programs. 🙂
If you’d like to better understand the tax benefits available to real estate investors, join the network. It’s free and you’ll be able to set up a strategy session with one of our highly experienced investment counselors.
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One would think that, with a Republican congress and a President who fully understands and utilizes these tax benefits, these proposals would end up in the trash. Instead, many 1031 exchange companies fear that the 1031 exchange could be repealed in exchange for reducing the corporate tax rate to 15%.