How Biden’s Capital Gains Tax Plan Changes the Investing Landscape

Nick Earls

Higher Taxes are Coming

Higher taxes are coming – in fact, they will already be in effect when these laws pass as proposed.

Smart investors might think it’s time to sell before the proposal goes into place, but unfortunately, this new tax plan is designed to prevent people from selling at the last minute.

Unless you can tell the future, it can be hard to know whether or not that’s actually an effective strategy policy-wise. But have no doubts, these new tax rates will hurt investors where it counts.

Biden’s changes are not just tweaks to the tax code. As of now, the top tax rate caps out at 37 percent. Currently, that’s not until you are above (for married couples) $628,300 in taxable income.

The new plan under Biden’s administration would raise the top rate to 39.6 percent starting December 31, 2021, for married couples with over $509,300 in taxable income.

But that’s not even the worst part.

Capital gains tax used to be a flat 20%. Now, Biden’s plan will effectively raise them to 39.6% PLUS the 3.8% Obamacare tax – for a massive 43.4% capital gains tax.

“We’re going to get rid of the loopholes that allow Americans who make more than $1 million a year pay a lower rate on their capital gains than working Americans pay on their work,” he said.

Here’s the worst part: this new rate will ALREADY be in effect, retroactively, to the date that the ambitious new tax plan was announced on April 28, 2021.

How much tax will I pay?

You can use this free calculator from Omni to calculate how much you will pay under Biden’s new plan

What Does This Mean for Real Estate Investors?

Whether you are investing in the stock market, real estate, or cryptocurrency, when you sell you will be subject to capital gains tax on your earnings.

This means investors have to be even more calculated than before when making investment decisions. Luckily, in the world of multifamily real estate investing, there is an elegant solution to this new problem.

The Power of the Infinite Refi Model

Every time you sell real estate, you’re getting hammered by capital gains taxes. President Biden’s proposal will DOUBLE the capital gains tax for high income earners, which is leaving investors scratching their heads wondering how to deal with such a significant increase.

There are two main forms of real estate investing: you can buy a property yourself and do all the work as a landlord, or you can invest in real estate passively through a real estate syndication.

For most people, they don’t have time to unclog toilets on the weekend, so they choose to invest passively in syndications. It’s basically a crowdfunding form of investment where you work with experts that find the deal and do all the work for you.

The problem is, the typical real estate syndication has a 5 year hold period. During the 5 years, investors get the cash flow, and then they get a huge cash infusion at the end of the 5 year period when the property is sold. But now with Biden’s proposal, the tax burden is too high for most investors to bear.

Surprisingly Simple Solution

The answer is actually really quite simple – if you don’t sell the property, you won’t ever get hit by capital gains taxes.

Yet investors still want that nice additional cash infusion you would get from a sale. The answer is a cash-out refinance at year 5 (or 7, or 10 – depending on your business plan).

This solution is truly the best of both worlds because you’re able to avoid paying an arm and a leg in taxes, while still getting the benefits as if you had sold the property. Better still, let’s say you invested $100,000 into a real estate syndication. For five years, you get passive income checks through the cash flow the property produces and then the property is refinanced.

At this point, you’ll get your initial $100,000 back in your pocket (plus all additional profit entitled to you), BUT you’ll still be in the deal because the property wasn’t sold. This means that your cash on cash return from year 5 onwards is infinite. You’re making a return as if your $100k was in the deal, but you’ve already been paid that money back when we refinanced.

All along, this has been the best way to invest in multifamily. Real estate investment firms and their investors have simply been a little hesitant to have a business plan that exceeds the traditional 5-10 year hold period.

With Biden’s new tax plan, however, everything’s changed. The proposed increase is so steep that investors are finding their way to the best option that’s been available to them all along: the infinite refinance model for real estate syndications.