Biden Capital Gains Taxes: A Comprehensive Overview

The Biden administration's approach to capital gains taxes has been a topic of interest for many investors. The top marginal tax rate for long-term capital gains is 20%, which is the same rate as the top marginal tax rate for ordinary income.

This rate applies to gains from the sale of securities, real estate, and other assets held for more than one year. The 20% rate is a significant increase from the previous top rate of 15%.

The 3.8% net investment income tax (NIIT) is still in effect, and it applies to investment income above a certain threshold. This tax is in addition to the 20% capital gains tax rate.

Check this out: Bonus Tax Rate

President Biden's budget proposal aims to increase the top income tax rate for wealthier taxpayers. This would affect individuals making $400,000 or more, who would be taxed at a top rate of 39.6%, reversing the "Trump tax cuts" in the Tax Cuts and Jobs Act (TCJA).

The current top tax rate, tied to inflation-adjusted tax brackets, is 37%. If the proposal passes, taxpayers making $400,000 or more would see a 2.6% increase in their top tax rate.

Biden's plan would not raise taxes on anyone making less than $400,000 per year. However, individuals with incomes above $400,000 would face a higher tax rate, with the top rate increasing from 37% to 39.6%.

The proposed tax rate change would affect not only ordinary income but also Medicare taxes. The Medicare tax rate would increase from 3.8% to 5% for people making more than $400,000 a year.

Here are the proposed tax rate changes in detail:

Keep in mind that these proposals are part of the Biden budget and are subject to change as Congress reviews the details.

The Biden administration is looking to close certain tax loopholes, including the carried interest loophole, which allows asset managers to treat certain compensation as capital gains, resulting in a lower tax rate.

The carried interest loophole has been a topic of debate, with the White House arguing that it's unfair to let asset managers pay a lower tax rate on their income compared to ordinary workers.

Biden's budget proposal would treat this compensation as ordinary income, eliminating the loophole.

Real estate investors can currently use a 1031 like-kind exchange to defer paying taxes on gains from certain real estate deals, but the White House calls this an "indefinite interest-free loan from the government".

Here are some strategies high-income investors use to minimize their capital gains taxes:

The proposal details are crucial in understanding how tax exemptions and loopholes work. According to our previous discussion, a tax exemption is a specific provision in the tax code that allows certain organizations or individuals to be exempt from paying taxes.

The most common type of tax exemption is the 501(c)(3) exemption, which applies to non-profit organizations. This exemption can provide a significant tax savings, allowing non-profits to allocate more resources to their mission.

The application process for a 501(c)(3) exemption typically takes several months to a year or more to complete. This lengthy process can be a major hurdle for some non-profits, especially those with limited resources.

Some tax exemptions are available for specific industries, such as agriculture or renewable energy. For example, the Section 1031 exchange allows farmers and ranchers to defer capital gains taxes on the sale of their land.

The carried interest loophole is a tax exemption that benefits asset managers. Currently, they can treat certain compensation as capital gains, resulting in a lower tax rate.

This loophole allows a significant portion of their income to be taxed much lower than if it were treated as wages. The Biden budget proposal aims to end this loophole by treating the compensation as ordinary income.

The proposal would bring the tax treatment of carried interest in line with other forms of income.

Additional reading: Capitalize Interest

You can hold assets subject to capital gains in retirement accounts, such as Roth IRAs and 401(k)s, which are exempt from capital gain taxes. However, withdrawals from these accounts are still taxed at the ordinary income tax rate.

Investing in your retirement account is a smart move, as it can help you minimize your capital gains taxes. By doing so, you can avoid taxes on your long-term capital gains.

Selling your assets slowly over time can keep your annual income beneath the $1 million threshold, allowing you to avoid taxes on your long-term capital gains. This strategy is called "time your sales."

Continually harvesting your losses by using capital losses to offset capital gains can also help reduce your financial burden. You can claim up to $3,000 and carry the loss forward to other tax years.

Donating appreciated assets to charity can qualify you for a charitable tax deduction and help you avoid capital gains taxes altogether. This is a great way to give back to your community while also reducing your tax liability.

Here are the four best strategies to minimize your capital gains taxes:

The Biden administration has proposed changes to estate taxes, aiming to restore the provisions in effect in 2009. This would lower the estate and gift tax exemption from $11,580,000 in 2020 per person to $3,500,000 per person, or $7 million for married couples.

Raising the maximum estate and gift tax rate from 40 percent to 45 percent is also under consideration. Alternatively, it's been suggested that Biden would seek to lower the exemption amount to pre-TCJA levels, which would be $5 million per person, indexed for inflation.

The potential changes to estate taxes could have significant implications for individuals and families, especially those with substantial assets.

A fresh viewpoint: Capital Gains and Estate Taxes

The 1031 exchange is a tax-deferred way for real estate investors to swap properties and delay paying capital gains taxes. This provision has been a cornerstone of real estate investing for generations.

Under Section 1031, properties are considered like-kind if they're of the same nature or character, whether improved or unimproved. For instance, an apartment building is generally like-kind to another apartment building.

Related reading: When Is an Estate Tax Return Required

Improved real estate can be exchanged for unimproved real estate, and city property can be swapped for a ranch or farm. The key is that the exchanged properties must be business or investment properties, not personal residences.

The White House has criticized 1031 exchanges, saying they amount to an "indefinite interest-free loan from the government." President Biden's FY 2025 budget would repeal this code section, eliminating the ability to defer capital gains taxes through like-kind exchanges.

Broaden your view: What Are Capital Gains Taxes on Real Estate

Kamala Harris has expressed support for a lower capital gains rate than in President Biden's plan. She previously supported higher capital gains and dividend taxes during her presidential campaign.

Harris' 2024 campaign indicated she supports increasing the corporate tax rate to 28%. In early September, she called for a 28% capital gains tax for high earners, those making over one million dollars a year.

The Democratic Party's 2024 platform shares a similar policy proposal, highlighting that some of the biggest companies in the US made $40 billion in profit but paid zero in federal income taxes.

The Biden administration's proposed changes to capital gains taxes could have a significant impact on real estate investors. The current 1031 like-kind exchange rules allow investors to defer paying tax on gains from certain real estate deals.

One of the key changes is the elimination of the IRC § 1031 like-kind exchange for real property. This means taxpayers would no longer be able to defer recognizing gain from the sale of appreciated property by rolling the gain into the purchase of a different property.

If this proposal is implemented, taxpayers who exchange one parcel of farmland for another would pay tax on the gain from the sale of the relinquished farmland and acquire the new farmland with a basis equal to the full purchase price. This would essentially eliminate the benefit of like-kind exchanges for real estate investors.

The real estate industry has relied on this provision for generations, but the White House has argued that it amounts to an indefinite interest-free loan from the government.

A unique perspective: Capital Gains Taxes on Primary Residence

The Biden administration's budget proposal aims to make significant changes to capital gains taxes. Under the current tax law, long-term capital gains are taxed at lower rates than ordinary income, but the Biden proposal would nearly double the capital gains tax rate to 39.6% for high-income taxpayers who make at least $1 million a year.

This increase would apply to investors who have held assets for more than one year, such as stocks, property, or crypto. The proposed capital gains tax rate would be a significant jump from the current top rate of 20%, which is already increased by the net investment income tax, bringing the typical top tax rate on long-term capital gains to 23.8%.

Some states would impose even higher combined state and federal rates, making the total tax burden even more substantial. In fact, 11 states would impose at least 50% capital gain tax under the Biden plan. Here's a list of those states and their combined rates:

The Biden administration argues that this change would help reduce inequality by making the wealthy pay their fair share of taxes. However, the proposal has sparked controversy, and it remains to be seen whether it will be enacted.