THE WHITE HOUSE VS. REAL ESTATE TAX BENEFITS It’s hard to imagine, but capital gains taxes were not always an inherent consideration for real estate ownership in the United States. Indeed, in 1894, the Supreme Court held that a federal income tax was unconstitutional!
It took more than 20 years for enough state legislatures to ratify the 16th amendment to the Constitution, allowing for the eventual proliferation of income and capital gains taxes. I A few years later, Congress deemed that merely switching properties should not trigger a tax on gains, if a taxpayer has not actually received cash or marketable securities. II We now know this concept by its common name, “1031 exchange”. Flash forward to the 1970s, and all levels of government—local, city, county, state and federal— were imposing layers of taxes on property owners, including capital gains taxes. One of the most aggressive of these tax policies was in California, where counties began reassessing properties at will and imposing punishingly high rates. In response, voters in 1978 approved Prop 13, which limited ad valorem taxes to 1% of purchase price and capped annual reassessment increases at 2%. The law also required voter approval for most types of new taxes.
Like the rationale for 1031 exchanges, the U.S. Supreme Court upheld the premise of Prop 13: a property owner should not be taxed on an increased value that is not yet realized. A retiree on a fixed income should not be taxed out of her home due to a mere increase in paper value. Despite decades of accepted tax law, the basic principle of tying tax to realized gains has been under attack in recent years. A damaging blow came in 2018, when Congress eliminated the application of 1031 exchanges to property such as cattle or farm equipment. Today, only business and rental properties qualify for tax deferral. Click here to learn more about basic 1031 rules.
THE BASIC PRINCIPLE OF TYING TAX TO REALIZED GAINS HAS BEEN UNDER ATTACK IN RECENT YEARS.
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