Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
What are the possible implications of Donald Trump’s tax code proposals on U.S. and global investing, including investments in real estate?
“Generally speaking, tax reduction is good for the U.S. economy,” said Michael A. Gillen, director of the Tax Accounting Group at Duane Morris, a Philadelphia law firm.
With more after-tax dollars available for citizens to invest and spend, “more money can go into the economy and be the impetus for growth. That’s good for the U.S. economy and, arguably, for other countries,” he said.
“Investors are feeling pretty good. They’re banking on lower taxes really driving wealth,” said David Y. Oh, a tax and estate planning attorney at PricewaterhouseCoopers in San Francisco who focuses on private and personal individual wealth for high-net-worth clients.
“Trump proposes to simplify the tax code by reducing the number of individual tax brackets from seven to three, and reducing tax rates,” Mr. Gillen said. Currently, the seven brackets range from 10% to 39.6%. Mr. Trump proposes three: 12%, 25% and 33%.
“If a person has $50,000 of taxable income now, his/her tax will be reduced under Trump’s proposed tax plan by almost 8%. With taxable income of $100,000, by almost 5%. With taxable income at $500,000, by 14%. At $1 million, by 20%, and at $5 million, by 17%,” Mr. Gillen explained.
The president-elect also wants to repeal the Net Investment Income Tax, or NIIT, a 3.8% tax resulting from the Affordable Care Act, he said. This would result in a lower tax liability for investments and allow “investors to make transactions without having to worry about the additional 3.8% surtax.”
“For the ultra wealthy, that would be pretty significant,” Mr. Oh said.
In addition, Mr. Trump has proposed eliminating the federal estate tax of 40% exceeding $5.45 million and perhaps doing away with stepped-up basis in assets at death, Mr. Oh said. If this comes to fruition, when heirs sell an asset later they would pay taxes on capital gains realized from the investment’s original purchase price, not a “step-up” value based at the time of the benefactor’s death.
If Mr. Trump wants to abolish the estate tax proposal, “what does he want to do with gift taxes?” Mr. Oh asked. “Estate and gift taxes usually go hand in hand.”
As for the impact of Mr. Trump’s policies outside of the United States, “it’s difficult enough to predict what Trump’s policies will have in the U.S., let alone elsewhere, particularly in Europe, where other factors such as Brexit come into play,” Mr. Oh said. However, “the Fed [Federal Reserve] is raising interest rates. Then the dollar will have more force in other countries. We’ll have to see what impact that has in the global market.”
“Often what happens in the U.S. economy affects global economy,” Mr. Gillen said. “After an initial stimulus period resulting from tax reductions and the impact of infrastructure spending, I think volatility will show its head. U.S. and global environments will be challenged.”
As for investor advice, “many investors are holding onto their investments–whether real estate, securities–with built-in gains for the time being to see whether taxes will drop,” Mr. Oh said. Lower tax rates in the future means less to be paid in capital gains on investments.
“Conversely, it might be a good idea to sell your losers and take more of a loss this year,” Mr. Oh said. “Loss harvesting is always popular at the end of the year. That would be especially true if taxes went down in the future.”
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