Capital Gains Tax Set to Rise

North Palm Beach, Florida - Net Lease Properties would like to delve into the subject of the prosperous Bush Tax cuts. With the Bush tax cuts set to expire on December 31, 2010, capital gains taxes will revert to 20 percent from their 70-plus-year low of 15 percent. In addition, barring legislative intervention, the tax rate on dividends will jump from 15.0 percent to 39.6 percent for top earners. When substantial tax code changes took effect in 1986, including a capital gains rate increase from 20 percent to 28 percent, investor liquidations nearly doubled the total realized capital gains from the previous year. Despite the decline in investment values over the last two years, many investors will likely follow this liquidation strategy, locking in their profits rather than waiting for investments to appreciate sufficiently to offset the 5 percent tax hike.
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If the current administration allows these provisions to expire on December 31, the top-tier personal income tax rate will rise to 39.6 percent from 35 percent. But lower-income families will pay more as well: the 25 percent tax bracket will revert back to 28 percent; the 28 percent bracket will increase to 31 percent; and the 33 percent bracket will increase to 36 percent. The special 10 percent bracket is eliminated.

Investors will pay more on their earnings next year as well, with the tax on dividends jumping to 39.6 percent from 15 percent and the capital-gains tax increasing to 20 percent from 15 percent. The estate tax is eliminated this year, but it will return in 2011. There has been some talk about reinstating the death tax sooner. Also as a result, many investors often choose to hold assets in the year following a rate hike.

We predict that with the increase in capital gains taxes, Commercial Real Estate Investors’ ability to defer capital gains indefinitely through 1031 exchanges will become even more attractive.

Here is some food for thought, since 2002, the year before the capital gains tax rate was reduced to a 70-plus-year low, the number of 1031 exchange deals has fallen by nearly half.
With the upcoming capital gains taxes rise, the share of deals involving 1031 exchanges will increase substantially, as sellers will be further discouraged from taking profits from the investment real estate sector.

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