The American Families Plan: Tax Implications for Real Estate Owners and Developers

On April 28, 2021, President Biden announced a plan to expand benefits for lower- and middle-income Americans under his “American Families Plan” (the “Plan”). To pay for the Plan’s benefits, President Biden has proposed certain changes to tax provisions under the Internal Revenue Code, many of which have serious implications for real estate owners and developers. Specifically, President Biden has called on Congress to:

• Increase the top individual income tax rate from 37% to 39.6%;
• Tax capital gains and qualified dividends earned by individuals with income above $1 million at ordinary income tax rates (i.e., 39.6%);
• Broaden the reach of the current 3.8% net investment income tax rate to apply to the above individuals, resulting in a combined top federal capital gains tax rate of 43.4%;
• Eliminate any basis step-up for a decedent’s gains in excess of $1 million (or $2.5 million for couples when combined with existing real estate exemptions);
• Increase income tax rates for those holding applicable partnership interests (so-called carried interest) to parallel ordinary income tax rates on their income;
• Eliminate like-kind exchange gain deferral on gains exceeding $500,000; and
• Permanently extend the restriction on excess business losses.

One important note: the Biden administration has stated that tax increase proposals generally are not expected to be effective retroactively but instead will likely be effective on a prospective basis beginning in 2022. 

At this stage, these are mere proposals. Further clarification is expected in the coming weeks and months. Congress’s thin party-line margin likely means that the above proposals may be limited or otherwise changed to gain the necessary support of all Democratic Senators and the near unanimous support of House Democrats.

We will continue to monitor and provide updates as more information becomes available.