Long Term Capital Gains and Real Estate
March 28th, 2008 . by Mike Kelly Capital Gains Tax
Q 18. What are the basic capital gains tax rates?
A The 2003 Act reduced the maximum rate on the net capital gains rate of an individual (net long-term capital gains less net short-term capital losses) from 20 percent to 15 percent. Net capital gains previously taxed at 10 percent were reduced to 5 percent.
Q 19. Has the holding period for long-term capital gains changed?
A In order to qualify for long-term capital gains treatment, property must be held for more than 12 months.
Q 20. Are there further capital gains tax rate reductions?
A In 2008, the capital gains tax rate for gains taxed in the lowest tax bracket (5 percent) will be reduced to zero.
Q 21. When did the reductions in capital gains take effect?
A The 2003 Act took effect May 6, 2003 and applies to taxable years ending on or after May 6, 2003.
Q 22. Do these capital gains rates expire?
A Unless the U.S. Congress extends them, under Section 102 of the 2007 Act the capital gains rate reductions will sunset December 31, 2010, at which time the rates will revert to 20 percent and 10 percent.
Q 23. Are there any changes to depreciation recapture rules?
A No. Generally, when selling investment real property, a tax is imposed on all amounts previously taken as depreciation. Under prior law, these amounts were taxed as ordinary income and not capital gains.
The 1997 Act provides for a 25 percent maximum tax rate on any gain attributable to depreciation already claimed on the property in the case of real property for which the maximum tax rate is reduced to 15 and 5 percent. Although there was an effort to reduce the recapture rate, no reduction materialized.
Example:
Ms. Seller purchases a triplex for $200,000 after January 1, 2001, and takes depreciation deductions of $50,000 over the six years she owns it. She sells the duplex for $300,000. Her basis in this property is reduced to $150,000 because of her deductions for depreciation, and she would have a $150,000 gain.
Under the 2003 Act, she would be taxed at a 15 percent (or 5 percent) rate on the $100,000 portion of gain over her original $200,000 basis and at a 25 percent rate on the $50,000 portion of gain attributable to her depreciation deduction.
Q 24. Can you provide a summary of the capital gains tax rates?
A Yes. Sales of assets held more than 12 months and sold on or after May 6, 2003 qualify for the 15 percent capital gains rate (5 percent for lowest income taxpayers and zero percent beginning in 2008). The capital gains rate reverts to 20 and 10 percent for assets held for more than 12 months and sold after December 31, 2010.
Q 25. Can I still take advantage of an IRC 1031 (”like kind” tax-deferred) exchange?
A Yes. The tax-free exchange of “like-kind” property used in a trade or business is not affected by the 1997, 1998, 2003 or 2007 Acts.
Readers who require specific advice should consult an attorney or CPA.
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