TAXPAYER RELIEF ACT OF 1997
Investors can finally breathe a sigh of
relief now that the new budget has been approved and there have not been
any significant changes to the last remaining tax shelter for investment
real estate, Internal Revenue Code Section 1031. Only 1031 exchanges
involving personal property predominantly used outside the United States
will be affected. A 1031 exchange can help investors accomplish many
investment goals such as diversification, consolidation, greater income
potential, less maintenance, less management intense and relocation or
expansion of a business or investment. You can sell one property and
acquire three or vice versa. Essentially, you can effect exchange after
exchange and perhaps, if planned properly, completely avoid the gain
altogether.
For those who are not sure whether to pay
the tax or defer, they should use the enclosed easy to use 1031 Exchange
Worksheet to get a better idea of how an exchange would work in their
particular situation. Following is a brief overview of the NEW Capital
Gain tax rates. The individual capital gains rates and holding periods
have significantly changed. Assets held for under one year will continue
to be taxed at ordinary income tax rates (39.6%). Assets held for over one
year but less than 18 months are taxed at a maximum of 28%. For assets
held over 18 months, the new tax rate is 20%, with depreciation recapture
at 25%. For those currently in the 15% bracket, the new capital gain rate
will be 10%. Beginning in the year 2001, assets purchased after 2000 and
held at least five years will be taxed at a maximum 18% (8% for 15%
bracket). The lower capital gains are all well and good if you no longer
wish to own business use or investment property. However, if you wish to
continue investing in real estate, why not complete a 1031 exchange, defer
the gain and REINVEST WITH PRE-TAX DOLLARS!
To determine what you would have to pay if
you didn't do an exchange, use the following rules:
- Subtract the sale price of the property
from the original purchase price (plus capital improvements made) and
times it by 0.20 (20%).
- Calculate all depreciation taken on the
property and times it by 0.25 (25%).
- Add both of the these figures and this
is the capital gains tax that would be due on the sale of your property.
Example: Lets pretend that twenty
years ago you purchase a property for $50,000. Over the years, you have
taken $30,000 in depreciation. The property is now selling for $250,000.
The capital gains taxes due would be calculated as follows:
- $250,000 (selling price) - $50,000
(original purchase price) X 0.20 = $40,000.
- $30,000 (total depreciation taken) X
0.25 = $7,500.
- $40,000 + $7,500 = $47,500 is the
capital gains tax that would be due.
Before you decide an exchange isn't right with you, look at the above
example and ask yourself if you would rather pay $47, 500 in capital gains
tax or use that money to reinvest in a new, more profitable investment.
Also For individuals, the exemption amount
for the unified credit for estates and gifts will increase from $600,00 to
$625,000 in 1998, and continue to gradually increase to $1 Million over
the next ten years.
