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Tax Updates and Strategies for a Recession

We had a good run while it lasted! Although not an ideal situation for real estate as interest rates rise to curb high inflation, there is always a silver lining. Tax strategies are like the cycles in the economy. We must adjust our strategies based on the trends in the economy and the changing incentives embedded into the constantly evolving tax law. Luckily, there are strategies that everyone can implement as we head into the uncertain 2023 landscape.


This article was originally published in the February 2023 issue of TRENDreport.

Secure Act 2.0 and ROTH Conversions

You have likely heard by now that the government has admitted defeat on the social security front by passing the Secure Act 2.0. This act has sweeping changes to retirement plans for individuals and employers. The message is clear: hopefully, you’ve been saving for your own retirement! You may remember from Tax 101 that there are two ways retirement plans are treated. There are traditional (pre-tax) contributions which are then subject to tax when withdrawn in retirement, and there are ROTH (post-tax) contributions which are not subject to tax when withdrawn in retirement. Pre-tax contributions are great for high income years because you’re saving tax at a high marginal rate and ROTH contributions are reverse. Therefore, a great strategy in the event you have lower income is to convert traditional IRAs to ROTH IRAs. This will result in tax, but the retirement account will grow without being subject to tax at a higher value when you retire. On top of this, ROTH IRAs are not subject to required minimum distributions (RMD) in retirement like traditional IRAs are. Thanks to the Secure Act 2.0, this now includes ROTH accounts through employer 401K plans, which were previously subject to RMDs. This is important if you plan to work beyond the retirement age (hopefully because you enjoy what you do, not because you didn’t plan for retirement).

Home Sale Exclusion for Appreciated Real Estate

Now I’ll admit, this is a strategy that is relevant in any economic environment, but I think it has even more relevance given the high inflation and substantial increase in housing costs during the last few years. The home sale exclusion applies when you have owned your personal residence and lived in your personal residence for at least two out of the last five years. The exclusion from income is $250,000 for single filing taxpayers and $500,000 for married filing joint taxpayers. This is potentially a $119,000 tax savings assuming 20% capital gains rate plus 3.8% net investment income tax for married taxpayers, which can help offset the cost on rising interest rates on the purchase of a new principal residence. For an advanced strategy, you could even pair this exclusion with the ROTH Conversion described above since the gain on excluded property will be omitted from your taxable income.

Sale of Loss Stock Against Real Estate Appreciation

This is a bittersweet strategy. If your portfolio is anything like mine, your securities account has taken a depressing dip, but you may have appreciated real estate that you’ve held for many years. The timing of this strategy is critical because net capital losses are limited to $3,000 to offset your other income. In other words, you wouldn’t want to sell loss stock alone and generate a loss greater than $3,000. However, you may want to liquidate appreciated real estate which is typically subject to capital gains rates and shelter that gain with the sale of loss stock that you don’t want to hold onto. This could save you the trouble of going through like-kind exchanges or other real estate strategies that may have more cumbersome tax laws to abide by.

Tax Free Financial Independence Education for Children

I love this strategy because it accomplishes three goals. The standard deduction for 2023 is $13,850 for single filers, including dependents. Therefore, you could pay your children $13,850 each for providing services to your business and they would not have to file or pay taxes. This assumes that your child has no other income during the year. This is great because you will receive a tax deduction for your business, but your children won’t pay any income tax! Secondary goals include the tax-deductible transfer of wealth to your heirs and teaching financial independence from a young age.

Final Words

We CPAs were inundated with reading during the last half of the year with the Inflation Reduction Act and the Secure Act 2.0. While there weren’t any “sweeping” tax law changes, there are many more important changes to watch out for on the horizon. There’s the phasing down of bonus depreciation from 100% for 2022 to 80% for 2023 which will likely have a minimal impact in the short-term, but once phased down to 60% in 2024 will show up more in tax liabilities for real estate professionals, and business owners. The IRS has also made it clear that the clean energy initiatives are a focus in the short-term with more guidance to come on solar installations for both residential and business properties. Namely, solar credits are now increased back to 30% through 2032, assuming new requirements are met. As part of these initiatives, the credits for the installation of various energy efficient property like water heaters, heat pumps, central air conditioning systems, furnaces, and electric panels were significantly increased. This is something to keep in mind for both tax savings and utility cost savings in a recession or not. On a local level, Arizona has reduced its individual income tax rate down to 2.98% for 2022 and 2.5% for 2023.

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