Democrats’ Tax Plans May Portend Rush To Tax-Advantaged Alts

The likelihood of higher US tax rates edged up on Wednesday as Senate Democrats passed a $3.5 trillion budget blueprint with a straight party-line vote.

The Democrats’ budget blueprint would raise taxes on upper income individuals as well as on corporations, to partially finance the massive planned expansion in government spending.

Amongst other tax increases, the Democrats are specifically seeking to increase the top marginal income tax rate for individuals, as well as the long term capital gains tax rate for individuals. The Biden administration has proposed 39.6% as the top tax rate for long term capital gains, although many observers believe the eventual rate will be slightly less.

Such a significant tax increase in the capital gains tax rate may give a short- and long-term boost to the alternative investment industry; many types of alts yield significant tax benefits to individual investors who are in high tax brackets.

Even before the Democrats’ tax plan is finalized, real estate investors may be motivated to complete 1031 exchanges (including into Delaware statutory trusts). It’s also likely that interest in qualified opportunity funds will continue to increase, since QOFs allow for capital gains deferral for many types of assets beyond real estate.