I also have in the last few years sold investment property, foregoing a 1031 tax defered exchange. Why did I do this. One, your friend is probably right. The capital gains tax will probably never be as low as it is now. I also think that it is going up, maybe 25% - 30%. So sell now and pay 15% or wait and pay alot more.
Secondly, when I sold a few of my properties I was trying to downsize and manage a smaller portfolio of properties. I didn’t want to acquire more rentals through a 1031 exchange. I wanted to simplify my life somewhat. I now have an amount of rentals that I’m happy with.
I’ve recently talked to a few other long time investors and some are doing what I have done. 15% cap gains is really not that bad.
I just had lunch with a guy that is going to "cash’ on most of his properties this fall instead of doing 1031 exchanges…
I was floored when he told me this…but his rationale is that he believes that the economy will force Either president candidate and the congress to raise the capital gains tax in either 2009 or 2010 and he decide to pay his taxes now.
He has been investing for 3 decades now and says he believes that he should pay taxes now at the low Long term gains rates that exist today.
I have mostly been a transaction guy so I never had dilemma as most of my stuff got hammered as ordinary income anyway.
but to see a 1031 master decide to begin to take the Gain through the end of this year opened my eyes a bit.
Any thoughts in agreement or to the contrary out there?
Many factors are beyond his control, for good or bad. Overall it may not be a bad strategy, but there are many personal things involved we’re not privy to - emotional considerations, how old is he and how is his health, how ok is his spouse and famiy with his properties, etc. As someone else mentioned, he has to beware of the AMT. You didn’t mention how many properties does he want to cash out? A few? A lot? But a couple big questions beyond his control are: how many of his properties will sell at an acceptable price, and how fast? Since the lending is tightening up more, is he willing to carry back paper? (which would impact his tax situation). And his properties that don’t sell soon may continue to help shelter some of the ones that do sell soon. And it’s very iffy whether he even can sell all of them for a decent price before the capital gains tax increases.
Other ideas to consider may be setting up a charitable trust - so he could sell two properties, cash out Property A, and donate Property B to a CRT to shelter some of the gain from A, and provide some lifetime income for his family. And another thread on this site a while back was a “Private Annuity Trust” an alternative to a 1031 for an older investor who may want to retire from the biz and lessen the tax bite (do a search for them to learn more about them). Not for everyone, but possibly for this person.
If any portion of the investor’s capital gain will be earned in a tax bracket up to 15%, then the capital gains tax rate on that amount is zero (0%) through 2010. Capital gains earned in higher tax brackets will be taxed at 15% for the next couple of years until the capital gains rate resets to 20% under the current law.
The pitfall to this strategy is that a large capital gain in a single year may trigger the AMT. The increased tax liability due to loss of preferred deductions for the taxpayer who itemizes may offset a significant portion of the capital gains savings.
On balance, if the investor is planning to cash out at some point in the future anyway, a phasing his sales over the next couple of years to avoid triggering AMT will probably pay off for the long run.
so says the preumptive Democratic nominee. That will be the single largest jump in capital gains tax rates, but will only effect the super rich, per the Democrats.