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The proposed increase in capital gains tax could lead to a surge in luxury sales

While much of the capital gains tax is still in the air, its potential impact on the wealthiest residents in the country leads luxury agents to be asked a series of questions by “highly motivated” sellers.

While much remains in the air about the proposed capital gains tax, its potential impact on the country’s richest residents leaves luxury agents and financial advisors faced with a number of questions.

To fund the $ 1.8 trillion American Family Plan to help families with young children struggling with poverty, President Joe Biden recently took the next steps to raise income tax from 37 percent to 39.6 percent for households earning more than $ 400,000 a year and to increase the income plan The long-term capital gain rate from the current 20 percent to 39.6 percent for those earning more than $ 1 million annually.

Capital gains tax would be applied to the sale of assets like real estate (as well as stocks and shares) that have been held for more than a year – that is, it creates a buzz in affluent enclaves like the Hamptons and Malibu.

Noel Roberts

“It’s something we talk about in every other conversation,” Noel Roberts, director of Nest Seekers’ local retail boutique in the Hamptons and star of the Million Dollar Beach House, told Inman. “As recently as last year, it became a problem for customers who had a property that they wanted to sell last year. Because it was rumored that Biden would fill the 1031 gap [a section of the IRS tax code that allows investors to swap one property for another and defer the tax]They were extremely motivated to see a sale by the end of the year. “

While places like Southampton and Malibu have average household incomes below $ 200,000, these places are also home to large numbers of residents who have millions of dollars in assets and several properties to rent out as investments. Marco Rufo, partner at The Agency in Pacific Palisades, said customers who will be hardest hit in the short term are those who are looking to trade or discharge expensive properties soon.

“In West LA, a lot of people make over a million dollars a year, so their federal taxes will rise by more than 20 percent,” said Rufo. “This is huge and the conversation people have is, how should I protect myself from it?” Accountants and financial advisors are already looking for loopholes and unfortunately they are likely to find them. “

Last year, luxury sales had the opposite effect as many predicted at the start of the coronavirus pandemic. While many thought financial uncertainty was causing an excess of vacation homes in the market, low mortgage rates and travel restrictions have skyrocketed the number of people looking to buy luxury, convenience-laden homes in popular vacation destinations. In the U.S., luxury home sales rose 41.6 percent year over year in the first quarter of 2021.

Marco Rufo

On a larger scale, both Roberts and Rufo believe luxury sales will continue to flourish. Moving investment properties and finding ways to minimize the tax impact has always been a strategy of those living in this type of ultra-luxury world.

Due to uncertainty about whether the capital gains tax will come into effect or who it will affect, Roberts said a number of high net worth clients who have sat on real estate in the hope that prices will go up are now motivated for the next Months to sell. Some even did so before the end of 2020 because they feared certain tax changes could become retrospective.

“This is something for [luxury agents] thinking about the rest of the year, ”said Roberts, citing an example from a developer client who traded in an ultra-luxury investment property for three commercial properties and is now wondering if selling it all and taking a tax hit was the problem Way Too walk. “I think we will see an increase in investment this year from customers who want to take advantage of the 1031 loss or just want to sell on [current] Tax rate as opposed to the future tax rate, which is almost twice as high. “

These types of concerns naturally seem outrageous to people who earn average salaries. As Biden often says at press conferences, the proposed tax changes are an attempt to level the playing field and address the kind of extreme inequality that is common in the world of luxury real estate compared to the average American.

However, the impact of the tax hikes is something that high-income developers and 1 percent people looking to sell in the short term are seriously considering. With many looking for ways to minimize the tax impact, the luxury real estate industry could see a number of interesting sales and wider aftershock effects in the coming months.

“Biden talked about it for a while, but it has gotten a lot more official over the past two weeks,” said Rufo. “Now everyone really has their eyes open.”

Email Veronika Bondarenko

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