Capital Gains Tax Rates Headed Higher After 2008 Election?

Our oft reviled President Bush helped pass significant tax reduction bills in both 2001 and in 2003. The 2003 bill lowered the maximum tax rate on long term (capital assets held more than one year) from 20% to 15%. The maximum tax rate on corporate dividends was lowered even further from a maximum tax rate of 38.6% to 15%. Maximum tax rate on all income was lowered from 38.6% to 35%. Capital asset investors (stocks, bonds, real estate etc.) seem comfortable with the idea that the existing tax rates on dividends, capital gains and earned income will stick around until at least the end of 2010--their scheduled expiration date. The odds of that occurring are, at best, 50-50 at this point.

Tax policy can be structured to achieve one or more of these three goals:

To provide government services to citizens;

To direct capital expenditures within the economy;

To redistribute wealth from those who have it to those who don't.

Democratic candidates for president have not disavowed the trial balloons by Democratic members of Congress to hike tax rates. What this means

Investors can expect higher tax rates post-2008 should a Democrat become president. None of the Democratic candidates for president has articulated a private sector pro-growth tax policy. Instead, their orientation appears to be toward wealth redistribution via higher tax rates. During the recent debate between Democratic politicians, Obama indicated that he wanted to almost double the maximum tax rate on capital gains from 15% to 28%. Clinton has stated that her maximum tax rate on capital gains would be 20%. Both of these candidates have indicated a willingness to raise taxes on dividends and on income of other categories. The existing tax rates are history post-2008 should a Democrat win control of the White House in this fall's election. That message is clear from Democrats on the House Ways and Means Committee who have already released a plan to hike personal tax rates.

On the other side is McCain, who has recently stated his support for extending the present tax-rate structure past 2010. However, McCain voted "no" on both the 2001 and 2003 tax rate reduction bills. So realistically, the likelihood of the 15% dividend tax rate and capital-gains tax rate remaining past 2008 is perhaps less than 50-50 at this point. The Danger

When Bill Clinton signed his big tax increase bill in 1993, the economy had been expanding for more than two years, and was able to power through the negative economic impact of the hikes. In 2009, the United States might be just emerging from a nasty downturn. Based on history, an increase in the capital gains tax would cause a net decrease in tax revenue at the very time when business needs to be stimulated! All candidates must take this into account when considering a tax increase.
Real Estate Investment Impact

Any increase in tax rate means more total dollars in the hands of government and less in the hands of the private sector. In general, this will mean increased challenges to holding onto your hard won wealth. What is your best strategy in this market? For Real Estate investors, Section 1031 of the IRS tax code is one of the last bastions of legal tax reduction. A 1031 exchange allows you to exchange your existing property for another property and defer paying the capital gains tax. As the capital gains tax rate increases, the value of doing a 1031 exchange becomes more valuable to the investor! Tax deferral under section 1031 can mean tax avoidance over time. Think of the tax deferred under a Section 1031 exchange as an interest free loan from the government--just what is needed in these unsettled times!

Embedded in Section 1031 are creative tax planning opportunities. The capital gain tax calculator found at 1031x.com Election Calculator, will let you estimate the possible impact of the increased taxes on a real estate investment and the value of using the Section 1031 exchange. Remember to work with a Qualified Intermediary who is bonded and insured. You can create a winning strategy, regardless of who wins the 2008 Presidential Election!