Given the timing of when this information is being provided, it is important to highlight two approaches that should be discussed regarding tax planning and its impact for calendar year 2020 and future years.
Traditional & Contrary Approaches to Tax Planning
The two approaches that are going to be discussed below will be a traditional approach and a contrary approach factoring in the current economic and political environment. Typical tax planning outlines ideas for deferring income and accelerating deductions to offset current tax burdens.
Proposed Biden Real Estate Tax Changes
Contrary to the typical planning items, this year we are dealing with an election year and the COVID pandemic. Both factors must be considered to properly plan for 2020 and future years.
Quickly, I want to summarize some of the proposed Biden tax changes that specifically affect taxpayers involved in real estate.
Biden proposed changes according to Bloomberg Tax & Accounting:
- Increase top individual tax rate back to 39.6%, but individuals making less than $400,000 would see no increase.
- Taxpayers with over $1,000,000 of income would have their capital gains taxed at ordinary rates (39.6%).
- Qualified business income deduction could see special rules for real estate investors be eliminated.
- Biden wants to investigate potential changes to like-kind exchange rules and disallowing real estate losses to offset other forms of taxable income.
Although it appears that Biden has been elected President, the likelihood of tax legislation consistent with above being passed will rely heavily on control of the Senate. Control of the Senate will not be decided until January 2021 after the Georgia run-off elections for both of their Senate seats.
Tax Savings Strategies
With these items in mind, tax planning has become a double-edged sword, where considerations must be given to immediate tax savings compared to long-term tax savings given the outcome of the election. Considerations must be given to the following factors:
Timing of Income or Gain Recognition
Traditionally, one would attempt to defer income into a future year where possible. Some options would include pushing a closing into the next calendar year or utilizing a like-kind exchange on investment property.
To the contrary, if Biden wins the election, a taxpayer may consider:
- Accelerating the timing of property sale to ensure lower capital gains rates.
- Accelerate other income recognition, to recognize that income in 2020 when tax rates are lower and other losses are most likely being experienced due to COVID.
Timing of Expense Recognition
- Bonus depreciation
- Traditionally, taxpayers would want to recognize 100% depreciation expense on qualified property placed in service during the year.
- To the contrary, taxpayers might want to consider electing out of bonus depreciation to ensure deductions are available for future years when tax rates increase.
Energy Tax Credits
Beyond discussing timing of income and expenses, it is important to also highlight the following two commonly used energy efficient credits and deductions that are available to real estate developers. Both items are currently set to expire as of December 31, 2020:
Section 179D Deduction:
This deduction allows qualifying building owners and businesses to receive up to a $1.80 per square foot tax deduction for their energy-efficient buildings placed into service during all open tax years.
Section 45L Credit:
This credit offers $2,000 per dwelling unit to developments with energy consumption levels significantly less than certain national energy standards.
With so many challenges already experienced during 2020, please let us help you with the uncertainty of the current tax landscape and determine the best strategy for your business.