Good morning everyone and welcome to a new week!
Biden’s new tax proposal, while far from being put into action, has the potential to make some huge changes to the US tax system. If you do not know anything about the proposed bill, we wrote about it in an April article that you can read HERE. The article talked a lot about the difference in the way Democrats and Republicans view taxes, especially when it comes to the wealthy. The traditional Democratic stance is that wage income and capital gains income should be taxed similarly because at the end of the day, income is income. They do not care where it comes from, its about what you take home. They believe this evens the playing field for those coming from more opportunity and those coming from less. The traditional Republican stance is that capital gains should be taxed less because capital gains income results in further business investment leading to innovation and a prosperous economy.
Now, the topic of today is the 1031 Exchange. A simple explanation of a 1031 Exchange is the ability to roll capital gains from one real estate investment to another without paying taxes on that gain. You can roll and roll your gains and are only taxed once when you decide to pull your money out. This means money compounds faster because the income is “tax deferred”. This has been a commonly used tool for those with real estate investments since its inception in 1921. In addition to the tax hikes addressed in our last article, Biden’s tax proposal would eliminate the 1031 Exchange. The reason for this is because he believes that the projected $41B saved by investors between 2020-2024 could be better used by the Federal Government to stimulate economic growth. Republicans argue that it has been proven over and over that business investment from individuals is more productive for the economy than the government allocated funds. In addition, this is a huge incentive for people to invest in communities and infrastructure. If we take that incentive away, we may see real estate investment and quality fall.
The Mortgage Backed Security market is slightly up this morning after a huge jump and fall this morning. The MBS market jumped above the Fibonacci level that they have been battling for the past 10 days. We are holding a locking bias because the 10 year is in a very narrow trading range and will soon have a breakout. We believe this breakout will be to the upside causing MBS’ to slide because of both inflation concerns and the upward trajectory it is on.
Have an awesome day everyone!