The Biden Administration has brought new energy to the proposed wealth tax. This tax seems to have become more than a campaign promise of Senator Elizabeth Warren. It may become a reality. In 2021, Senator Warren revived the legislation and reintroduced it as the S.510 Ultra- Millionaire Tax Act of 2021. So far, the proposed act has been read twice and referred to the Committee of Finance.
While it hasn't passed yet, it's clear that this tax may become a part of our economic reality. And the most effective strategy to brace for it with is advance tax planning. As part of the planning process, understanding the basic concepts of the wealth tax is essential. Let's explore those and delve into how it may have an impact on real estate.
The Ultra-Millionaire Act of 2021
Senator Warren’s proposed wealth tax of 2021 sets out to amend the Internal Revenue Code of 1986 and to combat income inequality by imposing taxes on the wealthiest among us. In addition to these goals, the tax is expected to raise $3 trillion over a 10-year period to invest in the nation. This tax will be levied annually on individuals and trusts who have net assets valued over $50 million at a rate of 2%, and an additional 3% will be levied on individuals with net assets in excess of $1 billion. To arrive at the value of your net assets (i.e., stock, real estate, boats, art, etc.) for the year, contacting your financial advisor is your best bet.
If the proposed act is passed and becomes U.S. law, the IRS will begin to levy this tax beginning with tax year 2023, and it may have some implications for owners of real estate.
The real estate impact
If passed, the wealth tax will expose owners of real estate to additional annual taxes, if real estate is part of the identified taxpayer’s net assets. At present, owners of real estate are only exposed to state and local property taxes, as well as capital gains tax upon the sale of the property (subject to the Section 121 exclusion).
If the S.510 Ultra-Millionaire Tax Act of 2021 is passed, the federal government would collect taxes on the assessed value of any real estate you own annually. This is not the traditional approach to taxation of property, and as such, many tax issues will likely arise from the passage of the act. In addition to the projected tax issues, you will see less money in your pocket and more money allocated to the amount of taxes you owe.
The Millionacres bottom line
While we can only speculate for now, what we do know is that if this proposed legislation becomes law, it will have a lasting impact on the taxing system and on Americans. If you are subject to this tax, advance tax planning will help you navigate the new tax system. This is a step you should never assume alone. Working with a tax professional is the safest way to minimize your risk of being audited while maintaining compliance with the IRS.