The US Family Plan aims to eliminate the tax rate on long-term capital gains. Profits resulting from asset sales would be taxed at the same rate if the seller owned the property for 6 months or 60 years. Discussions
The elimination of the rate of long-term capital gains will likely slow the immobilization market because it will change the economics of property sales. Why sell an asset if you know that you owe an enormous tax bill? The result could be a lower inventory on the real estate investment market. It could be a "market for sellers" with rising prices.
Real estate investors often assess their investment success based on the internal return rate (IRR). IRR is a reduction (interest rate) rate at which the net present value of the investment cash flows is zero.
Since the IRR is based on the time value of money, the time of disposal of cash flow affects the IRR considerably. When a sale is delayed, IRR decreases. When investors hold assets to delay taxable gain for longer periods, they will need to increase the current cash flow in order to attract investors from the IRR.
There are two ways of increasing current cash flow–increasing revenues or reducing expenses. Since the rates are influenced by supply and demand, there is a limit to how much a rental owner can increase. Owners can find it easier to cut costs by cutting facilities and postponing maintenance.
Capital expenditure is also frequently bought (where the investor receives new funding) or made ready for disposition (in hopes of a higher sale price). Therefore, extending holding periods of assets is likely to reduce capital improvements on properties, which affect the condition of the property.
Long-term capital gains interest and rates
Although the American Families Plan proposes "the permanent elimination of transported interest," technically this is not accurate. Sponsors may still receive transported interests. However, the gains in the carrying interest would be treated the same as all other sponsor income by eliminating the rates of long-term capital gains.
Payments on the interest carried by a sponsor as regular income are likely to change the way real estate sponsors invest. Sponsorship fee structures could change without treatment for long-term capital gains and less incentive for investors to sell and trigger payment on the interest borne by them.
With sponsors unencouraged to wait until the property is sold to receive their compensation, they could increase annual asset management fees or require higher upfront fees, in place of a carrying interest. And sponsors can be less focused on the longer-term increase in the value of real estate without a carrying interest. Instead, the focus may be on investment income.
Immobilien investment mainly held on current income can be managed differently than on long-term income. Since maintenance and capital spending can reduce the cash available for distribution as investor income, owners are less likely to not make any repairs or improvements.
Changing investment strategies in real estate
While taxes raise government money, tax policies also encourage (and discourage) taxpayers' conduct. Research differs as to whether the significant increase in the American Family Plan would increase the overall fiscal income after taking account of the decrease in property provisions. But research by the Tax Policy Center comparing historical capital gains rates with transactions supports the idea that investors change their behavior according to tax rates on long-term capital gains.
Thus, if long-term capital gains are eliminated, sponsors and investors will probably adjust investment strategies to offset the increased taxes. Some of these changes may include:
Increased use of payment sales and seller financing to increase sales revenue over several fiscal years
Reduced sponsor investment in the long-term success of a real asset by reducing or removing carried interests in favor of annual fee revenue
Longer periods of hold
Higher rents
Strategic maintenance postponement
Less investment projects
Reduced volume of real estate transactions
The real estate sector is currently an attractive investment as it can provide for legal income tax protection by depreciation and a lower tax rate on long-term capital gains. US immobilization is also the way investors can invest locally, because real estate can't move, while maintaining jobs is local and cannot be outsourced overseas.
If the tax rate on gains in capital is eliminated, investors generally and in real estate have little incentive to invest in long-term investments. Instead, it is possible for potential investors to spend their money and stimulate economic growth. They can also choose other investments, including an international component.
The majority of sponsors of property proforms do not include an income tax analysis for investors. That makes sense because the tax situation of each investor is unique. Until investors know how to tax their real estate investment income, they must create multi-scenario pro ways to evaluate potential tax liability.