Tax free capital gains?
I have read that the long term capital gains tax will be zero for the year 2008. Is this true? If so I may delay selling my remodeled house until next year. Please advise.
It is true that there is a Federal tax reduction on long term capital gains scheduled for sales in 2008, 2009 and 2010 under current tax law. This could very easily be repealed, possibly retroactively, if the DemonRats have their way; so there is no guarantee that anyone will actually be able to benefit from this.
Assuming our rulers can keep their hands off of this tax break, the actual size of the benefits is still very limited. As with all tax matters, the reality of its application is much more complicated than we all wish.
Under current Federal tax law, people with long term capital gains that would normally be in the 10% or 15% bracket only have to pay 5% Federal tax on just that portion of the gain in those lower brackets. The portion of the gains that push the taxable income into the higher brackets is taxed at 15%. You can see the 2007 brackets on my website. The 2008 inflation adjusted Federal brackets should be released in a few weeks.
Now for the special tax break. For sales in 2008, 2009 and 2010, that portion of long term capital gains that would otherwise be subject to a 5% Federal tax rate will have a zero Federal tax rate. The portion of the gain above the 15% bracket will still be subject to a 15% rate. In addition, depreciation recapture is not considered to be a capital gain and it will still be subject to a 25% Federal tax rate. State taxes will also still be applicable on the full gains; so the overall tax savings may be relatively minor, especially for the sale of highly depreciated property, such as rental homes. As Sherry mentioned earlier, 1031 exchanges will still be a very important tool for real estate investors wishing to minimize their taxes.
I hope this isn't too confusing; but out imperial rulers in DC seem to like to keep the rules as muddy as possible.
Let me know if you have any more detailed questions.