Additional Details on President Biden’s American Families Plan

• June 1, 2021
• Carey M. Heyman, CPA

Last month, President Biden unveiled his American Families Plan, which if passed, would significantly affect the real estate and private equity industries. The Treasury Department recently issued a comprehensive analysis of the Biden Administration’s tax and revenue proposals. Here is what we learned:

• Partial repeal of deferred gains from Section 1031 exchanges – The proposal would implement a limit on gains eligible to be deferred through Section 1031 exchanges to $500,000 per taxpayer (or $1 million for married individuals filing a joint return) for each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of these thresholds would be recognized by the taxpayer in the year of sale. The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2021.
• Carried interests would be taxed as ordinary income – The proposal would repeal Section 1061 for taxpayers with taxable income (from all sources) in excess of $400,000. Under the proposal, the income would be taxed at ordinary income tax rates, instead of long-term capital gains rates, and self-employment taxes would be required to be paid on the income. The proposal would be effective for taxable years beginning after December 31, 2021. Please note that the proposal is not expected to affect REITs that own carried interests in real estate partnerships.
• Significant increase in capital gains rates – Long-term capital gains and qualified dividends of a taxpayer with adjusted gross income of more than $500,000 (or $1 million for married individuals filing a joint return) would be taxed at ordinary income tax rates, with 37% generally being the highest rate (40.8% when including the 3.8% net investment income tax). These increases would be effective for gains required to be recognized after the date of announcement. To say it differently, the proposal would be effective as of the date of the announcement. It is unclear whether the phrase means when President Biden introduced his American Families Plan in late-April or when the budget proposal was released last week. Unfortunately, there is limited historical precedent for retroactive tax increases. Lastly, it should be noted that the American Families Plan also proposes to increase the top income tax rate from 37% to 39.6%, beginning in 2022.
• Transfer of appreciated property on death or by gift would be a realization event – Under the proposal, the deceased owner or donor of an appreciated asset would realize a capital gain at the time of the transfer. For a decedent, the gain would be calculated by determining the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in the asset. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in the asset. A transfer would be defined under the gift and estate tax provisions and could be valued using approved methodologies for gift or estate tax purposes. Some exceptions apply, but we will post about that later this week (that is called a hook, ladies and gentlemen).
• Gains on unrealized appreciated property – According to the proposal, gains would be recognized by a partnership, trust, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event in the past 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this proposal would be December 31, 2030.

This is a developing story. With tight margins in Congress (and unhappy Democratic representatives from high-tax states), concessions are expected to be made to the American Families Plan. Be sure to subscribe to the blog, visit CLAconnect.com and register for our Livestream Series for continued updates and analysis.

Sources: Treasury.gov; Bloomberg Tax

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