We’ve made it to election day and emotions are running high. It’s the most contentious presidential election in years, in a country bitterly divided. A cascade of crises have washed over our nation in 2020. More than control of the White House and Congress is at stake this year; the handling of COVID-19, battered economy, raging wildfires, civil unrest, and that’s a shortlist. President Trump and Joe Biden have radically different visions of America, and Americans have a lot riding on the outcome.
Depending on the results of the election, new tax laws could have an effect on the real estate land market. Both candidates have provided glimpses into their tax plans, so let’s examine and compare the tax policies of President Donald Trump and Democratic challenger Joe Biden and how their approach could affect the land market.
A conservation easement is a legal agreement, in which a property owner donates development rights on a piece of land to a public agency or qualified charity, usually a land conservancy. The donor retains ownership of the land but contributes its development value in perpetuity, that is, what the property could be at its highest and best use. Conservation easements incentivize property owners to conserve land and historic sites by offering a charitable deduction. The purpose of the conservation easement can be to protect wildlife, plants or ecosystem, preserve historical structures, preserve areas for recreation or education, or to preserve open space.
Conservation easements account for most of the charitable contributions he has made over the years. Trump has placed conservation easements on several of his properties. One on the Trump National Golf Club Los Angeles, prohibiting the construction of houses. In 1995, he donated a conservation easement on Mar-a-Lago to the National Trust for Historic Preservation that protects special features of the historic building and property, and later expanded the easement to limit home development. In 2005, Trump took a $39 million deduction for an easement on his private golf course in Bedminster, New Jersey. In 2015, Trump signed a conservation easement with a land conservancy, agreeing to avoid development on his Seven Springs estate in Westchester County, New York. Like other land owners in the United States, Trump avails himself of the benefit of conservation easements. But conservation easement transactions have been under heavy scrutiny from the Internal Revenue Service lately. On August 25, 2020, the Senate Finance Committee released a bipartisan report condemning syndicated conservation easements as abusive and encouraging the IRS to take further action.
Biden’s stand on Conservation Easements is one area that has not been verified. After scouring articles on the internet, Biden’s position on this tax deduction is hard to determine. Conservation easement law was passed with bipartisan support and was approved by both the Bush and Obama administrations. The deduction for conservation easements has enjoyed broad bipartisan support, but in December 2016, in the waning days of the Obama Administration, the IRS issued Notice 2017-10 in response to concerns about conservation partnerships (easements claimed by partnerships (and LLCs, S-corporations) with the benefits of the deduction spread out among the multiple partners). It took aim at taxpayers by subjecting them to complex paperwork and fees.
If you own investment property and are thinking about selling it and buying another property, you should know about the 1031 tax-deferred exchange. Named for the IRS tax code to which it pertains, it allows an investor to sell a property, to reinvest the proceeds in a new property, and to defer all capital gain taxes. The 1031 Exchange is vital to brokers and agents (more deals), banks and mortgage lenders (more borrowers), and property owners (increased demand). It helps farmers, ranchers and other rural landowners put the return on their investment to work when exchanging one property for another. Until recently, the exemption applied to an array of assets, such as industrial equipment and rental cars.
No change; President Trump’s tax plan is to simply secure the Tax Cuts and Jobs Act (TCJA), the Trump administration’s signature legislation. When the Republican Congress rolled out its tax-reform plan in 2017, it proposed eliminating 1031 exchanges altogether. Congress eliminated the provision for most industries under the TCJA, but left it open for real estate. The legislation also included a provision meant to spur investment into underdeveloped areas, called “opportunity zones.” The final law that Trump signed preserved Section 1031 like-kind exchanges for real estate. President Trump is heavily invested in the real estate space, encourages investment and is in favor of simplifying the tax code. If re-elected, he is expected to continue to protect favorable tax laws currently in place.
As part of his plan to raise taxes by an estimated $4 trillion, Joe Biden is proposing to repeal Section 1031 like-kind exchanges, as a means to pay for enhanced child care benefits and elder care over the next decade. Biden is selling a false promise – his proposed tax increase would finance a fraction of the cost of his new spending plan. Repealing 1031s would harm economic growth, threatening jobs and new investment in housing and land real estate.
Estate tax is a tax on the transfer of property after death. It is such a minor tax, yet it has continued to be a major partisan battleground. Democrats dislike estate taxes; they favor taxing wealthy people more at a time of surging wealth inequality. Republicans say it amounts to double taxation that places an unfair burden on family-owned businesses, like ranches and farms. The federal estate tax generally applies when a person’s assets exceed $11.58 million in 2020 at the time of death. Currently taxed on a graduated rate basis from 18 percent on estate values up to $10,000 to a maximum of 40 percent plus $345,800 for estates over $1 million.
In the 2016 campaign, Trump was specific about his plan to repeal the federal estate tax. Republicans haven’t succeeded in an outright repeal of what they call the “death tax”, but the tax overhaul that President Donald Trump signed into law in December 2017 doubled the amount of wealth that escapes the 40 percent estate tax. As landowners, ranchers and farmers recognize the value of the president’s tax cuts. Trump championed the efforts and outlook of farmers and ranchers, recognizing that there are no better stewards of the land than those who depend on it for their livelihood.
The Biden tax plan entails two changes to the federal estate tax. It would reduce the estate tax exemption by approximately 50 percent from its current level of $11.58 million of estate assets, thereby restoring the threshold for taxable estates to its pre-Trump level. The long-term Democratic tax policy is to continuously cut taxes on the middle class and the poor, and asking rich people for more money.
Today is election day, and a handful of states could decide if Donald Trump or Joe Biden is elected president. The election outcome and the resulting changes in future tax legislation remain unclear, but the real estate land industry has prospered under the Trump Administration and Republican-led senate. President Trump has succeeded in creating a strong overall economy, with increased income, spending power, and consumer confidence- all factors that fuel a healthy real estate market. Currently, optimism is strong among land investors and it has created a strong demand for land for sale. Let’s hope consumer confidence and enthusiasm continue post election and keep fueling an already surging land market.
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