Learn about the expected tax law changes and its implications for multifamily real estate investors
With conversations buzzing about probable tax law changes in 2022, multifamily real estate investors need to stay informed about the likely increases in capital gains tax rates to make the best possible decisions for their investment goals.
Continue reading to learn about the capital gains tax, its implications for investors, and expert insights on how best to prepare for the tax hike from our multifamily investment advisors.
What is the capital gains tax?
In the United States, the government imposes a specific type of tax—called the capital gains tax—on profits made from selling certain assets such as real estate properties.
Capital gains are made when the total sale price of an asset exceeds its initial cost, meaning the tax is only collected once an investment is sold. [1]
At the time of sale, you’ll be required to report the profit you make on your tax return and pay a tax at your personal income bracket’s capital gains rate as set by the Internal Revenue Service (IRS). [2]
How much are capital gains taxes expected to increase?
The capital gains tax rate has not yet been changed, but it is expected to increase to some extent within the next year.
Experts currently estimate that the top rate on long-term capital gains for those making over $1 million per year will rise from 23.8% to 28.8%. The 28.8% proposed raising estimation includes a 25% rate plus a 3.8% surtax which would go into effect at $400,000 of taxable income for single filers and $450,000 for married joint filers. [3]
The capital gains tax hikes are a part of other changing tax laws that are also expected to affect 1031 Exchanges. “All the big talk is on the potential increase of capital gains taxes in 2022, but the other thing that’s on the chopping block on the new tax laws is the 1031 Exchange. The proposals are to cap it at $500,000 in deferrals which is a huge difference from right now where it’s unlimited. Currently, you can just do an exchange and defer taxes,” explains Joe LaFleur, multifamily investment advisor and 100Units founder.
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What are the implications of the tax increase for multifamily investors?
If you’re a multifamily investor in a high-income bracket, the capital gains tax increase will affect you if you plan to sell your property in the near future. Instead of paying current rates, you will be taxed more depending on the tax reform laws passed.
If you’re an investor in a lower tax bracket, you may be slightly or not at all affected depending on your level of income and corresponding capital tax rate. It’s important to know where your annual income stands, and what tax bracket you fall into to best determine how to prepare for the tax increase.
What should I do to best prepare for the tax increase?
For multifamily investors making high levels of income annually, our investment advisors recommend that you sell your property now if you’re considering selling in the next five years.
“If you’re in the process of thinking about doing an exchange or selling a property, it’s very important to execute as soon as you can because the opportunity cost could be incredibly detrimental for you,” advises Joe. “We’re not sure where the tax laws are going, but right now 1031 Exchanges are still in effect and that’s something to definitely capitalize on if selling is in your near future.”
Additionally, multifamily owners should consider conducting a cost segregation study on their property to reap substantial tax benefits and improved after tax cash flow. “It’s very important to take full advantage of and capitalize on the opportunity to use a cost segregation study because they are going to become more valuable as the tax burden increases,” says Joe. “If you’re not familiar with cost segregations as an investment real estate owner, it’s an incredible opportunity to reduce your tax burden—we’re talking up to 20% of the purchase price off your taxes on the year of purchase. It’s an incredible opportunity to capitalize on, so I highly recommend it.”
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Sell your multifamily property now!
With ample experience and in-depth expertise, our team at 100Units is ready and excited to help you market and sell your Central Florida multifamily property! From determining the listing price to conducting the closing, we’ll facilitate a smooth transaction for you that works to help you achieve your investment goals.
To learn more, please contact us today at 866-GO-UNITS to connect with one of our multifamily investment advisors.
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Sources:
1: The Balance | What is the Capital Gains Tax?
2: IRS | Topic No. 409 Capital Gains and Losses3: Wall Street Journal | Capital Gains and Capital Pains in the House Tax Proposal