What are the capital gains rates for 2016?

  • By Berry - D1 test account (Spotzer)
  • 07 Apr, 2016
If a taxpayer sells real estate held for investment, including vacation rental property , for more – in nominal dollars – than was paid for it (as adjusted by its current basis, including recapture of depreciation), the taxpayer realizes “capital gain.” This “gain” is subject to taxes at the federal and, normally, at the state level.

At the federal level, the rates are often different from those on “ordinary” (wage) income or profits. The capital gains tax rate in 2015 depends on ones overall taxable income, the length of time the investment was held, and whether the taxpayer has offsetting capital losses to charge against some or all of the gain.

What are the capital gains tax rates in 2016?

State taxes? Alabama, for example, has a capital gains tax of 5%. (An out-of-state owner of assets in Alabama would normally pay that rate plus any higher differential imposed by the state in which the taxpayer resides.)

Subject to change by Congress, capital gains tax rates in 2015 for ordinary investments are as follows:

Short-term gains (gains on assets owned for less than one year plus one day) are taxed at the taxpayer’s ordinary income tax rates. Long-term gains (gains on assets owned for at least one year plus one day) are taxed depending on the taxpayer’s overall income tax bracket.

Thus, if that income falls in:

the 10% or 15% marginal income tax brackets, then the long-term capital gains tax rate is 0%.

the 25%, 28%, 33%, or 35% marginal income tax brackets, the long-term capital gains tax rate is 15%.

the 39.6% marginal income tax bracket, the long-term capital gains tax rate is 20%.

In addition, the capital gains of high-income earners are subject to a net investment income tax of 3.8%, above and beyond that capital gains tax rate. Those rates kick in at $125,000 if the taxpayer is married filing separately, $200,000 if single or as a head of household, or at $250,000 if married filing jointly or a qualifying widow(er) with a dependent child. (Recaptured depreciation is taxed at a maximum of 25%.)

Thus, the maximum, depending on the residency of the taxpayer, long-term capital gains tax for 2014 is 28.8% or more. For property held for less than one year the rate could be as high as 48.4%.

These realized gains can be non-recognized and the tax on them can be deferred through the use of a “Section 1031 exchange.” The usual disclaimers apply (consult ones own CPA, tax adviser, or TurboTax program), but anyone selling real estate should be advised to take the above into consideration.
By Berry - D1 test account (Spotzer) 08 Apr, 2016
Take a look at this YouTube video. The lady explains that in a 1031 one “rolls the gain” over into a new property to defer the recognition of gain. Starting with a $500,000.00 property with $300,000 in “equity” — which presumably is the original down payment and some as yet unrecognized capital gain — she speaks of “taking all the equity” and rolling it into a new property. It certainly sounds like she is suggesting exchanging into a $300,000.00 property and paying off the $200,000 (“non-equity”) mortgage on the relinquished property. But if you do that you will have received “cash boot” in the amount of $200,000.00 (represented by the forgiveness of the debt secured by the mortgage) which is as fully taxable as if you had actually received cash. To avoid this, one must replace the old debt with new debt (or cash) and exchange into a property worth at least $500,000.00.   Read my summary on how to structure a 1031 exchange.
By Berry - D1 test account (Spotzer) 08 Apr, 2016

Although 1031 Exchanges are primarily used to shift our equity from one property to another, there are ways of recovering some of that equity for use as leisure or further investment purposes.What is not customarily known is that you can use some of the equity from your property through proper refinancing. However, in theory there are two ways to use this premise and cash out some of your equity: pre-exchange refinancing, and post-exchange refinancing.  Only one way works.

The exchange rationale requires all of the proceeds from the sale of the relinquished property to pass to the Qualified Intermediary. But, suppose you want that new car or want to take the family on a vacation and don’t have the cash to do it. So, you decide to refinance your property shortly before the 1031 exchange and use that equity for your desired luxury item.  A good decision? Probably not, according to IRS v. Garcia.
In IRS vs. Garcia, it was decided that Garcia when refinancing his property in anticipation of the 1031 exchange, should have paid taxes on the money not used on the new property. The IRS successfully argued that when Garcia took out money before the 1031, it was akin to telling the settlement agent to pay him some of the sale proceeds at closing. In short, you cannot take out your equity just before the 1031 exchange. The ‘boot’ is acceptable only if you pay taxes on it or cash out equity. Garcia tried to avoid the tax and ran afoul of the 1031 rationale, and the IRS.
Refinancing the replacement property is a way of avoiding the Garcia issue. This is where post-exchange financing comes into play. Not all taxpayers want to leave their equity in the replacement property – some want to take out that equity and buy more real estate. But, how long should you wait after completing the 1031 exchange before you take out the equity in the replacement property? Some say wait a nanosecond.
The nanosecond refinance is waiting just long enough after the 1031 to show the IRS, through the closing statement, that you’ve re-invested all of your equity into the replacement property. In a separate transaction, a new statement is used to show that the replacement property is encumbered with new debt via a loan or mortgage. Thus, there is a pool of money you can access after the tax exchange.

By Berry - D1 test account (Spotzer) 07 Apr, 2016
If a taxpayer sells real estate held for investment, including vacation rental property , for more – in nominal dollars – than was paid for it (as adjusted by its current basis, including recapture of depreciation), the taxpayer realizes “capital gain.” This “gain” is subject to taxes at the federal and, normally, at the state level.

At the federal level, the rates are often different from those on “ordinary” (wage) income or profits. The capital gains tax rate in 2015 depends on ones overall taxable income, the length of time the investment was held, and whether the taxpayer has offsetting capital losses to charge against some or all of the gain.

What are the capital gains tax rates in 2016?

State taxes? Alabama, for example, has a capital gains tax of 5%. (An out-of-state owner of assets in Alabama would normally pay that rate plus any higher differential imposed by the state in which the taxpayer resides.)

Subject to change by Congress, capital gains tax rates in 2015 for ordinary investments are as follows:

Short-term gains (gains on assets owned for less than one year plus one day) are taxed at the taxpayer’s ordinary income tax rates. Long-term gains (gains on assets owned for at least one year plus one day) are taxed depending on the taxpayer’s overall income tax bracket.

Thus, if that income falls in:

the 10% or 15% marginal income tax brackets, then the long-term capital gains tax rate is 0%.

the 25%, 28%, 33%, or 35% marginal income tax brackets, the long-term capital gains tax rate is 15%.

the 39.6% marginal income tax bracket, the long-term capital gains tax rate is 20%.

In addition, the capital gains of high-income earners are subject to a net investment income tax of 3.8%, above and beyond that capital gains tax rate. Those rates kick in at $125,000 if the taxpayer is married filing separately, $200,000 if single or as a head of household, or at $250,000 if married filing jointly or a qualifying widow(er) with a dependent child. (Recaptured depreciation is taxed at a maximum of 25%.)

Thus, the maximum, depending on the residency of the taxpayer, long-term capital gains tax for 2014 is 28.8% or more. For property held for less than one year the rate could be as high as 48.4%.

These realized gains can be non-recognized and the tax on them can be deferred through the use of a “Section 1031 exchange.” The usual disclaimers apply (consult ones own CPA, tax adviser, or TurboTax program), but anyone selling real estate should be advised to take the above into consideration.
By Berry - D1 test account (Spotzer) 07 Apr, 2016

These taxes can be deferred by structuring your real estate transaction as a Section 1031 Exchange.

1. Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture. I will be posting a discussion of how “Go-Zone” property will be taxed if not exchanged into what would have been “Go-Zone” property.

2. Federal Capital Gains Taxes: A new higher capital gain tax rate of 20% has been added to the tax code. Investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.

3. New Medicare Surtax Pursuant to IRC Section 1411: Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”). The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.

4. State Capital Gains Taxes: Capital gains recognized from the sale of property in Alabama will be taxed at the rate of 5% by the State of Alabama, and may be subject to the difference in the state of residence by that state if the capital gains tax is greater in that state (normally giving the taxpayer a credit on the tax paid to Alabama). This general rule applies in each state.

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