A Fork in the Road

While final election results trickle in and lawsuits over alleged voter irregularities move their way through the courts, things seem to settling down and the country is acclimating to the inevitability of a new presidential administration starting on January 20^th, 2021. 

All eyes have shifted to the state of Georgia, where two runoff elections will decide which party controls the US Senate. To be sure, those contests could be game changers. A Democrat sweep would give control of the upper chamber to the Democrats who could then proceed with plans to raise taxes on personal income and corporate income, along with other measures to eliminate 1031 exchanges, tax capital gains at ordinary rates and do away with the step-up rule, which is a foundational element of estate plans for those at all levels of net worth. 

Just one win for the Republicans would act as a firewall against Biden’s tax platform. They would have a sufficient voting block stop not only new taxes but also attempts to eliminate the Senate filibuster rule, which could lead to the addition of two Democrat strongholds, Washington DC and Puerto Rico, as new US States, a transparent attempt to add four Democrats to the Senate roster. The filibuster rule is one of the most powerful tools intended to give voice to the minority on an issue and encourage compromise in the legislative process. 

No real word yet on who will emerge victorious in Georgia, as pollsters, who took a beating in November, seem reluctant to double-down with fresh predictions.

So, here we stand at a fork in the road as it relates to buying, selling and operating real property assets. 

If the Democrats prevail, they could take the left fork and move to raise taxes on multiple fronts that would impact the value of real estate assets. Taxing capital gains at ordinary rates would take the current 23.8% max rate for capital gains (20% plus the 3.8% Obamacare tax on passive income) to 43.4% (if combined with an increase of the marginal income tax rate to 39.6% from the current 37%). If this happened, outright sale activity would fall sharply. If 1031 exchanges were also eliminated (one of the key advantages of owning real estate), transaction activity would likely decline further along with property values.

If the Republicans hold their Senate majority and vote as a cohesive block, they will head down the right fork in the road and these tax increases will have little chance of passage. The sides would be at odds with each other as usual, a condition that is generally favorable to the investment community, as it increases the level of certainty regarding key issues like taxes.

While we try to avoid taking political positions in our communications with you, the foregoing is simply the facts of the matter at hand and we present it with your interests as a property owner or user in mind. For now, we sit and wait for Georgia voters to decide who will represent them in the Senate, but in doing so, they will determine which fork in the road the nation chooses.