As 2021 moves into the final quarter of the year, now is the perfect time to evaluate your plans for next year. You should keep in mind the possibility of coming tax changes that might have a massive impact on your property sales.
Will capital gains taxes change in the near future?
The coming federal infrastructure package will undoubtedly mean a lot for developers of green energy. However, the funding for these initiatives has to come from somewhere and one of the methods discussed is an increase of the capital gains tax.
There is a great deal of opposition to raising the capital gains tax, but there is also a lot of support. As of this writing, it’s not unclear exactly what the package’s final details look like. However, understanding the implications will go a long way to protecting your interests.
How would a capital gains tax increase affect real estate?
Investment real estate sales profits are capital gains and are subject to the highest capital gains tax rate. While residential and personal real estate has some protections, the capital gains of investment firms do not.
The classic way to mitigate such a high tax bill, however, is reinvestment. If you reinvest your profits from an investment property sale, you can avoid your capital gains tax in what is called a 1031 exchange.
This method would likely still work if the capital gains taxed were significantly increased. However, not reinvest every property sale. It is those sales that will find a significant tax liability.
Capital gains may eat into profit margins
Profits matter. Anything that makes a negative impact on profits can and will create difficulties in your projections. It may be time to consider accelerating any current property sales.