The Latest White House Tax Code Idea

On today’s show we are looking at what might become another tectonic force in the world of real estate investing. 

The White House provides a steady stream of topics that are worthy of discussing on any real estate podcast. This week is no exception. On Tuesday of this week, the President floated the idea that maybe houses will be exempted from capital gains tax. The thinking is that this would stimulate the real estate market. 

A change like this to the tax code would require Congressional and Senate involvement. The final definition of what type of property would qualify to achieve the tax exempt status has not been articulated. 

So on today’s show we are going to dive into the dangerous realm of speculation for what that might be the consequences of such a change. 

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Episode Transcript

(00:02):
Welcome to the Real Estate Special Podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're taking a
look at what might become another tectonic force in the
world of real estate investing. The White House provides a
steady stream of topics that areworthy of discussing on any real
estate podcast. This week was no exception.

(00:22):
On Tuesday of this week, the president floated the idea that
maybe houses will be exempt fromcapital gains tax.
The thinking is this would stimulate the real estate
market. Now, of course, a change like
this to the tax code would require congressional and Senate
involvement. The final definition of what
type of property will qualify toachieve the tax exempt status

(00:42):
has not been articulated. So on today's show we're going
to dive into the dangerous realmof speculation for what might
be. In today's U.S. tax code, there
are several ways to defer or in some cases outright avoid
capital gains tax. Now I'll be be clear, we're
talking about tax avoidance, nottax evasion, which is something
completely different. By taking an investment gain and

(01:05):
investing it in a qualified opportunity zone, you can
shelter your investment from capital gains tax.
This is true for the sale of an apartment complex or a single
family home. Both could be sheltered using a
qualified opportunity zone investment.
You could also shelter yourself from capital gains tax
obligation by doing a like kind exchange under section 1031 of

(01:25):
the tax code. This is the so-called 1031
exchange. Both of these come with
considerable but not insurmountable amount of
paperwork. So if you absolutely want to
shelter an investment from capital gains, you do have
mechanisms to do that today. But neither a qualified
opportunity zone or the 1031 areeasy to use.
In the case of the 1031, you've got 45 days to identify the

(01:47):
replacement property and then another 135 days to close after
that. 45 days is not a lot of time, it goes by quickly.
Rather than buy a poor investment property just to meet
that 45 day deadline, some wouldjust rather pay the tax.
The notion of making homes tax exempt is not entirely new.
In fact, in Canada, real estate is subject to capital gains
tracks treatment, but there's anexemption for your principal

(02:10):
residence. So in Canada, if let's say you
own three single family homes, your principal residence would
be exempt from capital gains tax, but maybe your cottage and
rental property would in turn besubject to capital gains tax
when you sell them and like. And if you change the use of
your principal residence from being the place where you live
and you start to rent it out, then you would also lose that
principal residence exemption. In the US, there's absolutely

(02:31):
demand for detached housing. The problem is affordability for
many households and some of the most popular states in the US
are suffering from following home ownership.
I'm thinking of places like California.
People are able to afford a home, they generally go out and
buy one. Some are tenants by choice, but
most are not. Now, the US also has a primary
residence exclusion where you can exclude up to $250,000 of

(02:53):
capital gains if you're a singlefiler and half $1,000,000 if
you're married and filing your tax return jointly.
In order to qualify, you must have owned the home for at least
two out of the five years beforethe sale, and you've used the
home for your primary residence for at least two out of those
five years before the sale. And those two years do not need
to be consecutive. And you can only claim this

(03:14):
exclusion once every two years. The only thing that will drive
investment in more houses, then,is by making rental homes tax
exempt. If someone wants to buy a house
to live in, they're not out there thinking, oh, I better
think twice about buying a housebecause if it goes up in value,
I might have capital gains tax to pay.
They're thinking first and foremost, where do they want to

(03:35):
live? Where will the kids go to school
and how far is it to drive to work in the grocery store?
So capital gains tax exemption will do nothing to stimulate the
market for owner occupied homes.How many smaller investors don't
invest in real estate because either they don't understand it
or maybe they don't want the headache of managing a physical
asset like a property. So the real question is where is

(03:57):
the administration going to create the incentive?
Will it be focused on single family homes?
Will it be single family homes? Maybe.
If they have an accessory dwelling unit, will it still
qualify? After all, what's the difference
between a duplex and a single family home with an accessory
dwelling unit? Both provide housing for two
families. Will the definition of tax
exempt properties follow the classic residential one to four

(04:19):
definition and anything considered commercial of five
units and above? Maybe that will be subject to
capital gains tax. We don't know because it hasn't
been implemented, and at this point we're just speculating.
But if it does get implemented in some form, we can reasonably
expect that smaller investors will overwhelmingly choose to
buy properties that qualify for the tax exemption.

(04:41):
That could mean the capital thatwould have been invested in
apartments will never even consider apartment investing as
an option. In fact, even larger investors
may choose to maximize their taxexempt investing up to the point
wherever those limits get placedon the tax exemption.
And while the exemption may stimulate single family home
investing, we can reasonably expect that apartment

(05:02):
investments might be an unintended casualty of such an
initiative. As you think about that, have an
awesome rest of your day. Go make some great things
happen. We'll talk to you again
tomorrow.