Tax Deferral in the Face of The 2010 Health Care Bill & the Expiration of the Bush Tax Cuts

Although George W. Bush has been out of office for four years, the implications of his tax cuts are still in place….but perhaps not for long. In 2001, Congress passed The Economic Growth and Tax Relief Reconciliation Act of 2001 (a.k.a. “The Bush Tax Cuts”) which effectively lowered the Federal capital gains tax to 15% on long term investments. This means that an investor can expect to pay 15% of the gain to the Federal government if they decide to sell and “cash out” of their investment property instead of completing an IRC §1031 exchange.

For example, if an investor bought a commercial building in 1995 for $1 Million and sells it in 2012 for $2 Million, they can expect to pay approximately $150,000 (15%) in Federal capital gains tax. (Note: For simplicity, this example does not address depreciation recapture taxes, state taxes or improvements to the property.)

As it stands right now, “The Bush Tax Cuts” are set to expire at the end of this year. With 2013 fast upon us, it is possible that “The Bush Tax Cuts” will fade into the annals of history, thus causing the long term capital gains tax on investments to rise from 15% to 20%. Although this 5% increase seems minimal, the investor with the $1million gain would expect to pay an additional $50,000 in capital gains tax if they sold and “cashed out”, rather than exchanged into like-kind property.

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