Page 13 - Boca Club News - June '21

Boca Club News, Page 13

Legal:

Biden’s Proposals and Real Estate

By Michael J Posner, Esq., a partner President Biden has suggested several proposals to for at least one year. The current capital gains tax depends
in Ward, Damon, Posner, Pheterson raise taxes, in part to fund the trillions already spent on on the annual income of the taxpayer. The lowest income
& Bleau, P.L. a mid-sized real estate COVID-19 relief, plus another 2+ trillion dollars proposed tax payers pay an effective rate of zero on capital gains.
and business-oriented law firm for infrastructure improvements. These trillions in Middle income earners will pay capital gains tax at a rate
serving all of South Florida, with expenditures have greatly increased the federal deficit. To of 15%, and high net earners pay a capital gains tax rate
three offices in Palm Beach County. cover some of these new expenditures, President Biden has of 20%. There is also a secondary net investment income
They specialize in real estate law and made several proposals that will directly affect real estate tax, which tacks on an additional 3.8% on top of the base
can assist sellers and purchaser with and real estate investors. Keep in mind these are proposals capital gains rate.
closing and financing of residential only and may never be enacted as laws, or may be enacted Biden has proposed increasing the Capital Gains Tax
and commercial real estate including 1031 Exchanges. in very modified forms. to 43.4% (including the net investment income tax) for
They can be reached at (561) 594-1452 or at mjposner@ Capital Gains tax is the tax on investments holdings, taxpayers with annual income of over one million dollars.
warddamon.com. including real estate holdings, which are held by the owner This is an increase of 19.6% or $196,000 more in tax on
every million dollars in net taxable gain. This threshold will
likely affect very few individuals, as fewer than 500,000
Louis Vuitton Wine? people in the United States earn this much money.

Many real estate investors who are guided by family
estate planning avoid paying capital gains tax due to the
‘Where Fashion And step-up in basis provided to families on the death of the
property holder. For example, a property purchased in
Wine Merge ...’ 1970 for $100,000 (the basis) and worth $1,000,000 in
2021 would ordinarily result in a capital gains tax of up to
$214,000, and if Biden’s higher rate passes, up to $390,000.
However, if the owner dies, the next generation inherit the
property with a step-up in basis equal to the value at date of
By Laura Berrio, Freelance Other fashion companies have followed the same death, of $1,000,000. If the children then sell the property
Writer/Blogger path. Ferragamo and Bulgari have vineyards and estates for $1,000,000, they would pay no capital gains tax.
When I think of Dom in Southern Tuscany. One of the Guess brothers, who Biden’s proposal would eliminate the step-up in basis
Perignon, Veuve Clicquot, cofounded the company, has a 55-acre Napa vineyard and in most cases, excluding only family-owned farms passed
and French wine, I picture a winery. Chanel bought St. Supery vineyard and winery in down to family members who will operate the farm and
small family-owned business Napa. property that is contributed to a 501(c)(3) charity. This
with fields of old vine grapes. With all of these “luxury” brand companies proposal will likely spur less long-term holding by some
In reality you have to look to lending their name and efforts to making great wine and investors who often hold property too long, solely to reach
the fashion industry to find the Champagne, it has me thinking of other fun potential the tax deferred status.
owner. ventures. … Last month, I wrote in this column about using a 1031
Wine and fashion are two • AVEDA could make an organic wine tax-free exchange to gain an interest in property as a tenant
of life’s greatest pleasures! • Rolex could make Champagne to rival Dom Perignon in common with other owners to gain passive rental income.
What goes better than a glass of wine and a fashion • YSL could make a wine that has anti-aging beauty A 1031 Exchange allows a taxpayer to defer the capital gains
magazine? You don’t have to look far to find brands like properties tax by transferring their basis to the new property. If, in the
Louis Vuitton, Chanel, Ferragamo and Diesel in the wine The list is endless, but one thing is for sure, more example above, the $1,000,000 property is sold in 2021, and
business! and more companies are entering the world of “wine” and the seller timely invests the money in a new property worth
In the past you could buy a Louis Vuitton wine carrier changing our perception of our everyday glass of wine to at least $1,000,000, they will pay no capital gains tax, but
… but now you can buy their wine and Champagne to that of a “lifestyle” choice. the new property will receive the original $100,000 basis,
go in them. In 1987 Louis Vuitton and Moet Hennessy ~Cheers! so eventually the capital gains tax will be paid (presumably
merged and formed LVMH. LVMH now owns over 60 ~ Keep the conversation going with cheaper dollars in the future). However, when coupled
subsidiaries, including Dom Perignon, Veuve Clicquot, and the wine flowing! with the step-up in basis, an investor can compete multiple
and Belvedere Vodka, along with many other “luxury Follow the Vine on Instagram exchanges in their lifetime, then up to death, give the
brands.” @VineVibeUncorked. property to their heirs with a step-up in basis, thus never
paying any capital gains tax on the original investment.
Paid Advertisement Biden’s proposal would reduce the maximum amount
allowed for a 1031 Exchange to $500,000 in profit, which
would greatly curtail the use of 1031 Exchanges to defer
tax. Congress estimated, under today’s tax law, that 1031
Exchanges may save investors $41.4 billion in taxes from
2020 to 2024. If the rate is capped, the scenario above would
mean that even if our seller timely invests the money in a
new property worth at least $1,000,000, they will still owe
capital gains tax on $400,000. This will result in a tax of
between $95,200 and $173,600.
Investors should consider these changes and start

Stylish Modern Atmosphere Make Reservations happy hour planning accordingly, including escalating potential sales
in 2021 should the taxes pass and become effective in
every Day 3 - 6 pm 2022. As someone who closed many real estate deals up to
midnight December 31st, 1985 (when passive income loss
and Mon. - Thurs. taxes were eliminated in real estate), we may see a similar
all Day at Bar Only rush at the end of this year to beat the substantially large
tax increases and low caps.
Lunch SpeciaLS

every Day
starting at 9
$