The Biden administration has proposed some changes to tax law that, if passed, will apply to the entire 2021 tax year. Some of the provisions will have great impact on multi-family owners. Below is a brief summary of 2021 tax changes and what multi-family owners should know.
Capital Gains Taxes on Property Sales
The most potentially significant change for multi-family property owners is the increase in long-term capital gains tax. If your household earns over a million dollars, your tax rate on the sale of investment properties could be increasing from 20% to 39.6%. Add to this the existing surtax of 3.8% and Massachusetts capital gains tax of 5.1% and your total long-term capital gains rate could be 48.5%. Obviously, such a major change requires careful financial planning before selling real estate investments and other long-term assets. It’s yet to be seen whether 1031-exchanges will be in jeopardy too. If not, that will be an important tool for multi-family owners to defer payment of capital gains.
Additionally, high income earners (defined as households making over $400,000) will be limited in the amount of itemized deductions allowed. Deductions will be capped at 28%. Therefore, it’s important to strategize about other tax minimization techniques with your financial planner and tax advisor.
Small business owners who typically take a Qualified Business Income (QBI) deduction will also be effected. This deduction will be completely removed for households earning above $400,000. Whether this affects you as a multi-family owner depends whether you file Schedule C or Schedule E for your rental income. The deduction was only allowed on Schedule C income to begin with.
Higher Income Tax Rates
The third major change is a tax rate of 39.6% for earners above $400k. This is a 2.6% to 4.6% increase above previous levels. Compounded by higher capital gains tax and reduced deductions, the overall impact of these combined changes will be much greater for many.
What Multi-Family Owners Should Know About 2021 Tax Changes
It’s yet to be seen whether this new tax plan will get passed, but it’s important to know that it will apply to the entire 2021 year. So, it’s important to consider them in any financial decisions made right now. This is especially true if you intend to sell properties this year. Consult with necessary advisors and run estimates not only for your earnings but also for tax effect. With complete information on current and future tax law, you can make better decisions as a real estate investor.
Note: This article was written on February 14, 2021 based on currently available information.