1031 Tax Exchange Information
The Taxpayer Relief Act of 1997, The "20% Myth"
The law aimed at balancing the federal budget lowered the capital gains rate. However, the capital gains rate changes are not as straight forward as they seem. Many investors mistakenly believe their long term capital gains will be taxed at 20%. While gain from appreciation is taxed at 20%, gain from depreciation is taxed at 25%.
Example:
A Property purchased for $75,000 is depreciated and later sold for $150,000. At the time of the sale the adjusted basis is $25,000 creating gain of $125,000. Is the capital gain 20%? No! Only gain from appreciation is 20% (i.e. the $75,000 increase will be taxed at 20%). The remaining gain from depreciation of $50,000 will be taxed at 25%.
Additionally, most states will apply state taxes over and above the Federal tax rates.
| HOLDING PERIODS AND INDIVIDUAL TAX RATES |
| Holding Period |
Sale JANUARY 1, 1998 and later |
| 12 months or less |
Taxed as ordinary income |
| More than 12 months |
Upper Bracket 20%
Lower Bracket 10%
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- If a taxpayer in the lower tax bracket realizes a large capital gain they may be forced to realize part of their gain at the higher 20% rate.
- Corporate brackets of 15%-35% remain the same.
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Disclosure
Jerry Babin - Realtor with RE/MAX Southern Realty cannot advise you concerning the specific tax consequences or advisability of a deferred exchange for tax planning purposes. You will be required to seek the counsel of your accountant or attorney. If we can answer any of your general questions, or those of your representatives, please do not hesitate to contact us.
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Resort
E-mail: jerry@jerrybabin.com
