TxAG#2011 said:
Yes, ad valorem tax is already taxation on unrealized gains and the result isn't the downfall of capitalism as people are implying.
People are blowing up over this yet it would only affect ~10k individuals who can almost certainly afford to pay this tax and it will certainly not pass as congress will unite to protect their donors so this is just theoretical.
Nonsense. The people this would be subject to this (which I can promise you, if this stupidity somehow got enacted it would be far more than 10k and the arbritrary "high net worth" figure would comes lower and lower with each passing year) are already paying like 30-40% of their unrealized gains on their primary house each year in taxes. Now you want to take away 25% of their gains on EVERYTHING THEY OWN.
Let me just clue you in on an example since its obvious you have never spent a minute around the investment class.
$100M net worth guy owns a commercial real estate firm and buys an apartment complex worth $50M that generates $2.5M in NOI. He funds it with 70% debt and raises 35% in equity to cover the rest, closing costs, and capex. Equity in the deal is $17.5M. He puts in $2M of his own money and raises the rest from family offices and accredited investors.
After year 1, the property has appreciated 5% in value primarily through cap rate compression. NOI is relatively flat from acquisition and no cash flows have been paid to investors yet as the plan was to start distributions in Year 2 and sell by Year 5 for an IRR of 20%, and since NOI hasn't grown much, there's not enough funds to distribute anyway, likely accruing toward the terminal sale year. At the end of year 1, uncle same now gets $625,000, equal to 4 months of NOI. Except that money doesn't exist. Operations are flat. Value was grown from falling cap rates while any incremental increases in rents were already offset with increases in property tax, insurance, and controllable expenses that have grown 3% with inflation.
And the same can be expected in each year of the deal. There was no cash flow generated to pay the first year's Kamala tax, requiring an capital call from investors or a new credit line to be opened. Now year 2 comes and Kamala is expected to get roughly the same tax while cash flow, though likely decent at this point, still hasn't generated enough to pay off the first year Kamala tax, much less the second. We likely go into year 3 and possibly Year 4 with no distributions to investors.
The property value continues to rise 5% each year until year 4, and by Year 5, cap rates rise significantly and are 100 basis points above where they were at purchase with NOI up 25%. The property is worth $52M. The partnership has paid $2.5M in Kamala taxes to date and likely hasn't been able to distribute a dime to investors, including high net worth principal. If they sell, after closing costs and loan payoff, there's likely $15M AT MOST to distribute. Not only have none of the investors made any money, they likely don't even get their original equity back in full.
You know what happens if a law like this goes into affect? This quick behind the napkin scenario gets put into every acquisition model, business startup model, and every single investment model for ANYTHING in the country. And the investor decides.. "not worth it".
If your goal is to completely iradicate investment capital from America, then ya, back Kamala. Guess how much property taxes will be going up when jurisdictions and state and local governments have nobody willing to own investments and less taxes are coming in from commercial real estate, stock market, private and public businesses, etc. And let's see if capitalism breaks or not.
"H-A: In return for the flattery, can you reduce the size of your signature? It's the only part of your posts that don't add value. In its' place, just put "I'm an investing savant, and make no apologies for it", as oldarmy1 would do."
- I Bleed Maroon (distracted easily by signatures)
