How Biden's Capital Gains Tax Proposal Will Affect YOU

Hey, hey, welcome back to the show. Today we're going to talk about the recent tax proposals from President Biden in relation to 1031 exchanges, corporate tax rates, and capital gains. Now on this episode, I am going to try my best to not be any political affiliation. I don't want to be swayed. I want to just give the facts and give my analysis on what the economics will play out. So I'm not trying to say this president or that president, this, what's better, what's worse. I'm just going to play out the facts. Now, as well, I have a lot of people online saying, well, this doesn't affect anybody that's earning less than $400,000 a year. And so I see a lot of people online like, oh my gosh, people— you guys have probably seen these memes, right? Like, oh, everyone's mad that doesn't even— they make $50,000 a year and they're mad. Number one, if you're not close to the That tax bracket or in that tax bracket or aspiring to be in that tax bracket in the next 3 to 5 years, you probably shouldn't listen to this show. Like you should just move on to the next video. This is not for you. You should go watch Netflix at night and don't watch this show, okay? Number one. Number two is it does affect your life. Even if you're making $75,000 a year, these tax changes will drastically affect the companies you're working for, how they hire and fire. Employees, how you can think about real estate in the future and now, and what those tax changes will do for your market, your home price, and homes that you want to get into. This affects everything. Stop saying that it doesn't affect you if you only make $80,000 a year. This affects every piece of the economy. So with that being said, welcome back to the show. It's going to be a fun episode. I'm going to try to give all the facts. We'll probably do a follow-up episode. We'll see. By the way, this is a proposal. We'll see if Congress passes this. I think they're going to have a hard time getting 50 votes. In Congress, in the Senate, to pass this. We'll see though. We'll see what happens. As well, if you guys like this video, click on the like button below. That helps the YouTube algorithm to, I guess, push this video out. So if you guys can, that's a thank you to this channel. That'll help our channel grow faster. As well, as you guys know, we give away money to new subscribers and best comments. So Dan— actually, this goes to Dan today. Dan wins: Could you do a series on taxes and the different ways to avoid tax personally and various funds? Dan, this video is made for you. You got $100 coming your way. If you guys want to be entered in, comment below and subscribe, and we will pick somebody on every single video throughout the month and we'll send money. So Dan, reach out to us. We'll send you a $100 gift card for whatever you want. All right, with all that being said, let's dive into things here. So first, just the proposals, okay? So first thing, President Biden has proposed changing the capital gains rates from currently 20% All the way up to 40, they'd be net after their net worth tax to 43.3% on capital gains. Now for people that don't know what capital gains are, when you hold, this is long-term capital gains, if you hold an asset, a stock, a security for more than a year, in some cases over 3 years depending on the asset type, you do not get taxed at normal ordinary income, you get taxed at a lower rate. This was done to, again, incentivize investors to put money into markets, to put money into assets, to take risk, to risk their own money and dollars into a company they believe in, and it helps spur on investment. That's the first change here. We're going to talk about that more in a second. Next one, they want to take away 1031 exchanges. 1031 exchanges is where you can move, when you're buying and selling real estate, when you move from one real estate property to another, You do not have to pay the capital gains taxes on that asset because you're just transferring ownership from one asset to another. They want to change that. Third, we're going to talk about carried interest inside of funds and then fourth, we're going to talk about the corporate tax rate changing from 21% to 28%. This should be a pretty interesting episode and I want to play out, you guys probably already know these things, but I want to play out the economics of what might happen if these things are changed. Distilled. Now, my first thing I want to say overall in taxes, my viewpoint on taxes, how they've used the tax code since the 1940s, they realized that this is— the IRS realized that if they gave certain tax incentives or things where you could get tax breaks, that people or investors would flow monies and people would shift in a certain way to avoid paying taxes. From the 1940s till today, the IRS has continued to make their tax code more and more, we always say it's so complex because they give away great incentives for investors. A great example right now, if you invest into green energy, there's huge tax incentives that you get by doing so because certain administrations want to add investment into green areas. So the same thing if you have children, if you have lots of children, you get certain tax breaks. If you do certain types of businesses or certain types of investments in different fields, you will get incredible tax breaks because you are helping move forward humanity and the IRS wants to incentivize people to do that and it's a very powerful incentive. When tax breaks are given, you see tons of money moving and that's why the IRS does it and that's why the IRS code today is so complex. There's so many little things and loopholes, all these crazy things. They're not, I don't think of them as loopholes. These are ways to incentivize people to do different things. The first one I do want to talk about here is this one, carried interest. As you guys know, inside of funds, we've drawn this out before, if you run a fund and you make money above a pref or usually we'll just call it performance, performance returns, you get, it's called carried interest and carried interest is not taxed at ordinary income. It's one of the greatest benefits of running a fund right now is if you Run a fund and you make, you know, you have your 8% pref and you split 80/20, 20% comes to you over here, this is where the lion's share is, where fund managers make their millions and millions of dollars, this is not taxed at the typical 37%, 39% ordinary income rates. It is taxed at currently 20%, and I think Trump raised it to 25%, and you have to hold the assets for 3 years, but that's a significantly lower rate. Do this now. You might say that's greedy. Why would they ever do that? Fund managers obviously are swaying political leaders. The IRS did this to incentivize people like me and you to take risk. It's a risky business running a fund and starting a business. They wanted to incentivize entrepreneurship. And so if I take the risk of starting a fund, I'm going to get a little bit of a tax break on the back end. Okay, that's why carried interest, it's one of the biggest things for funds is that they get this huge tax rate because what does a fund do, by the way? How does that move forward economic growth? You're grabbing investors from all over the world, pooling them together, and you are investing into small startup businesses and venture capital. You're investing into private equity. You're going to grow and develop businesses, make them more efficient. You're going to issue loans. You're going to issue debt. You're going to issue buying and selling securities, okay? Yes, there are some corporate raiders. Yes, there are people that short the markets, but still they are making markets more efficient. The whole goal of a business is to make money, so if there's a company that is doing fraudulent things and a short seller can expose that, that makes the markets more efficient, okay? It's good, this is capitalism in general. You put out, it's essentially A/B testing, right? You put out all the players And the best players who can make the most efficient amount of capital will win over time. Communism in China, they pick their winners. They say, hey, we have an oil company we love, this is our oil company. If it's efficient or not, if it overpays employees, underpays employees, whatever, it doesn't matter, we'll just fund it and it'll be good. If it's doing ill, you know, hurting the environment, whatever, it won't work, we'll still fund it. In America, we've got, a ton of oil, let's use oil and gas or energy, if they're hurting the environment in certain ways, investors will vote with their feet. They'll vote with their dollars and go somewhere else. And that's why capitalism is so beautiful. So right here, the first thing, carried interest. This will disincentivize fund managers to run funds and to take risk inside here, which will hurt investment into small venture companies. It'll hurt investment into entrepreneurship. It'll hurt investment into into different firms because there's gonna be less funds doing it, okay? This is how it affects, back to how it affects your thing. That's the first thing here, carried interest. On that same note, it was actually interesting, I was listening to Warren Buffett the other day. Do you guys, anybody else listen to that? Great conference they did there, Berkshire Hathaway, him and Charlie Munger up there. And corporate tax rate, he goes, you know, they're planning right now to raise it to 28% here, okay? It's currently 21%, Janet Yellen wants to move it to 28% and do actually, she wants to do a universal 28% tax rate. Because right now what happens is a lot of these corporations just set up an Ireland account or business, they set up a Cayman Islands business, Luxembourg business, they pay zero taxes overseas. When taxes flow to the United States, yes, they have to pay them, but they'll do a lot of tax strategy that way. She wants every country to sign up and do a 28% tax rate, essentially like a cartel would do. A cartel, they set a price, its economic term is a cartel, not like a drug cartel, but an economic term of cartel where You'll see OPEC will do this with oil. They'll just peg a price. They control all the supply, so they can peg a price and do whatever they want. Same thing here. It's interesting though, Warren Buffett, he goes, how much would you pay for— and he goes, we have Class A stock and we have Class B stock in Berkshire Hathaway. I call this a Class AA stock. You get guaranteed every year 28% of all of the earnings in Berkshire Hathaway every year guaranteed, and you don't take any of the risk, and it's a guaranteed payment or we'll throw you in jail. He goes, essentially, the federal government owns 28% of Berkshire Hathaway right now. That's essentially what's happening with a corporate tax rate. The government— And they set the rules of how much they can own. And then he, so he goes, if we set up like a SPAC right now and you could buy into Berkshire Hathaway AA stock that's guaranteed 28% of all earnings, no risk, no liability, and the owners get thrown in jail if they don't pay, how much would you pay for that stock? And it was a very good question. And I like the way he framed that 'cause it's true. The government really controls 28% of every company in the United States. and a lot of overseas companies as well, how much would you pay for that AA stock? Now let's move up here to 20% to 43.3% capital gains rates. It's the same concept. Investors are incentivized to take a risk with their own dollars. And in a company, let's say you spent 30 years building your home bread shop, local bread shop, you've 30 years, you build it up, you sell it. For three million dollars, right? This incredible, great growth entrepreneurship immigrant family—it's awesome. With state taxes, they're going to be paying in California fifty-six percent. New York about fifty-six percent as well. Low end would be Texas like forty-three percent. Okay, still very high. You are giving more than half away of that thirty years of growth you're giving, and you're going to trigger that highest tax bracket because you're going to sell it all in one day. Three million dollars—you're giving away half. Back to the government. Half. When a government's taking more than half of your income, what kind of government do we live in? I don't know, it feels to me like we're living in a communist country a little bit. If a government's gonna take half of your income, I don't know, to me that feels like, that's the reason that all the Founding Fathers rebelled against Britain was taxes. And the current, guess what the current tax rate, by the way, I did some research on the history books, It was around, I'm gonna mess up this number, it's around, overall tax rate was like 14%. 14%. And they were rebelling, throwing tea in the river, all this kind of stuff, okay? Today we're talking about 50% total taxes on all of this, okay? I think, now this is just doctrine by Bridger, but I think if you raise, doubling the rate, and this is the same thing we're talking about in 1031 exchanges, I believe it will halt transactions. I think both these and a 1031 exchange, you guys should know what those are, but where you can transfer ownership of an asset from one real estate product to another real estate product and you don't pay capital gains. So a lot of people will buy a duplex and that duplex for $500,000 will, over a couple years, will be now worth $1 million and they'll take that $1 million instead of paying half of the $500,000 they made, so $250,000 to the government, now they only have $750,000, they take the whole million And they can roll that into maybe a $2.5 million 6-plex. And they now have a 6-plex, $2.5 million, and they hold that for 5 or 6 years and then they can sell that and buy a 10 or 12-plex. And they don't pay taxes on every single transaction. Same with a lot of house flippers and other things. They can move money between assets because essentially you're not making money, you're just transferring it from one asset to another. It's called 1031 exchanges. This is why there's a lot of liquidity, decent amount of liquidity and transactions in the real estate markets. See the same thing in the stock market. If you sell a stock and you've made some money, you instantly pay, if you held it for more than a year, 20% on capital gains. What I believe will happen is over, if this gets put into place the next few months, and it doesn't matter, right now investors, they're like, should we sell, should we not sell? It's not gonna matter, they can just make it retroactive. retroactive where they can go back in time. So if you sold today and the law went into act maybe in 6 months from now, they can retroactively say, no, all of 2021, it just, we're screwed anyway. So I don't think, we saw a decent drop in the markets right as they announced this, but I don't see it's gonna happen. But what I think will happen is people will hold. People just won't sell. Well, I've got my position, I believe in my position, I hope, I'm just gonna hold for the time being. And because if you don't sell, you don't pay taxes. And what they'll do is borrow against those assets. So I actually don't see a lot of selling. I actually see, especially in real estate, let's talk real estate for a second, the 1031s. Who would sell? Right? You have a property, you know, you got a decent— market's gone up like crazy recently in a lot of states, in my state particularly. You have a decent price on your— but if I sell, Now I've got to pay double what I thought I was going to pay in taxes, and I can't 1031 that into anything else. Why would you sell? Unless you're going to get a 40%, 30%, 40% increase on the purchase price, maybe you'll sell at that point. That's the market that you'll think you'll be at, but why would you sell? Unless you have to sell or something crazy happened in your life, you wouldn't sell, and so, and you would wait. for the next president or another Congress to vote and change back these laws, because these laws have jumped a lot. You had President Bush put them like really down, Obama put them up a little bit, you had Trump with the JOBS Act in 2017 bring these down. I mean, it changes quite a bit, these tax codes. So I would wait. And so what'll happen right now, there's already an undersupply of homes and home prices are already pricing out of a lot of average Americans cannot buy homes anymore. I think the prices are going to soar. I think prices will go up like crazy on real estate assets if they take away 1031s because there's going to be a very low supply of sellers. Who's going to sell? And if there's no sellers, then there's more demand from buyers, then prices will have to go up and either transactions will just halt because buyers won't want to buy that high. So in my opinion, why would you sell? And if you look at economics in a supply and demand chart, anytime you put taxes in there, What happens is you have this inefficiency that happens where sellers won't sell because they've got to compensate for a tax hike or a price, and buyers don't want to buy because that price is too high, and so you have these inefficiencies in the market, and you actually don't find the true price because of taxes, and actually it hurts the economy overall when you tax it. Actually, there is, it's less efficient in markets. If you look at your supply and demand curves, it's a lot less efficient. in these markets. Now, Bridger, you're looking at this from a capitalist point of view. 100% I am, okay? I love capitalism. I think capitalism is the reason you can see this video right now on YouTube or podcast, whatever. The reason we have all these things around us is 'cause of capitalism. I'm a huge capitalist. I love capitalism. I think it's the greatest thing on the planet Earth is capitalism. It's natural. It's no government interference, as least as we can. The government's gonna protect and secure borders and protect things, But besides that, let people and companies decide what's most efficient. Let people vote with their wallets and feet. Here you are forcing certain things to happen. So anyways, I'm getting on my soapbox here, but I believe that there is gonna be a stoppage in transactions in real estate. Now, I'm probably, I'm bullish on new builds. People can build, right, and sell. They can build new, and we need a lot more inventory in a lot of areas in the country, so new inventory's gonna be great, and the real estate markets I think will be awesome. I think builders are gonna have a heyday with this because current owners are gonna be priced out. But builders are just gonna build. However, the problem with builders is costs have gone up through the roof. To build a house right now is like 4 times as expensive in lumber and you have steel and all these prices are through the roof as they were, you know, 6 months or a year ago. And so everybody's getting priced out in the real estate markets. I think there is gonna be a stoppage of transaction and it's actually, it's creating, the wealth gap is getting wider. That is widening the wealth gap even further. I know Biden's all about tax the rich, tax the rich, but I think that's going to widen the wealth gap and you have poorer people that are going to get poorer and richer people are going to get richer because this is going to price out— most people say their biggest wealth came from owning a home. This is going to price out a lot of homeowners. Um, I, it's just a sad thing. It's also gonna, um, I think in markets For my portfolio, I'm just gonna hold. I believe in my portfolio long-term, I'm just gonna hold. There's no reason to sell. Even if there was a significant drop, I'm not gonna sell and enact this huge tax rate. It just doesn't seem wise. And then third, I think this hurts, and for a lot of people that are working at business, this hurts entrepreneurship in general. If you're gonna have a corporate tax rate of 28% and you're gonna, want to take a risk to go start a business. And by the way, I believe entrepreneurship, if you look at the GDP of all emerging market companies, actually every country in the world, specifically though emerging markets is really fun to look at. So, you have Nigeria, you have South Africa, you have all these countries that are kind of up-and-coming countries. You see a direct correlation between entrepreneurship and GDP. I mean, it makes sense, right? More entrepreneurs, higher GDP. Less entrepreneurs, lower GDP, lower growth. You see that in the United States. You see that in France and Spain. You look at any country and you look at their entrepreneurship growth, GDP is directly affected by that. GDP, jobs, standard of living, everything gets raised when entrepreneurship happens. And that only happens when people are allowed to take risk. Starting a business, starting Google or Apple or starting a bread shop or a coffee stand takes risk. Starting a fund takes risk. And that risk is compounded when the government is going to take 28% of your earnings, whether you like it or not, they're going to take it. And if you don't pay, they're going to throw you in jail. That compounds your risk as an entrepreneur. And so, I think for anybody, even if you're not in that $400,000 tax bracket or above, This affects you. I think jobs will decrease. I think companies are gonna be tighter. They're gonna automate more work. They're gonna find robots or other things to do your job. They're gonna find more ways to get around and move money out of the United States to other countries and keep capital overseas in Ireland, in Cayman Islands, in other places, these tax havens, so that they don't have to pay These huge tax rates for employees in the United States. I, I, um, I don't know. That's my— that's— those are some facts and probably a lot of my opinion. Anyways, I like talking about this show. Put some comments on what you guys think of this episode. Let me know what you think. We're probably gonna have to do another episode on more. This is me just riffing. I know you guys have probably seen all the stats and everything. This is me going off on taking all this data and applying it to real life, what I think will happen. Let me know in the below. If you got anything out of this show, click on the like button. That helps the YouTube algorithm. Boost this channel just as a kind of a thank you to this channel. We want to help each other out on here again. Dan, you won $100. For people that want to win, drop an awesome comment below and subscribe. We're going to send new subscribers every month $100. We're going to pick some winners on our videos. If you guys are interested, do that below. It's been a fun episode. We'll see what happens with tax changes. It might be that it might be perfect for our economy. It'd be great. These are a few negative things that might help though. Biden wants to pay for a lot of family things. He's got his family bill he wants to pass and a lot of other great things, which. might actually help the economy as well. So anyways, let me know what you guys think in the show notes below, and we'll see you guys later. Bye. Bye.