Capital Gains Rate Increase...Sell-off?

[Thailandnotes]

My wife and I were toying with selling our house in Virginia (not our primary residence). I talked to a tax accountant today. If we sell it in 2012 the capital gains is 27,000 dollars on 200,000 dollars profit. (Without any other income, the first 70,000 in gains are exempt.) In 2013, that exemption goes away and the long-term capital gains rate increases to 25 % so the tax bill almost doubles to 50,000 dollars.

Two questions:

1.) If the capital gains tax increase remains in place, how big will the asset sell-off be in November/December, and
2.) What will happen to the rate gold profits are taxed at?

[Raz]

Re: Capital Gains Rate Increase...Sell-off?

I thought the Capital Gains rate would rise to 20% from 15% in January; what's with the 25%? Does it include Virginia's CG rate?

[anthonydr2]

Re: Capital Gains Rate Increase...Sell-off?

Generally it has been expected that income tax rates and capital gains tax rates were likely to rise. Those wishing to lock in their gains under past structure have likely already acted. Our actions began months ago and have been completed by more than a month. We've worked to uncover every paper based capital gain we could realize in 2012 and done just that... The IRS will be collecting more than their fair share from my household for 2012...I expect others are doing/have done similar and that any tumult in OND '12 will not be tax rate determined.

On gold tax rates....who knows. Has potential to vary from year to year and to be a target by TPTB.

[charliebrown]

Re: Capital Gains Rate Increase...Sell-off?

Do cap gain rates effect AGI in such a way as to start dimishing some credits, like child credits, charitable deductions etc? So if I rotate out of GTU and back into it to capture the 15% rate, but as a result increase my AGI enough to start limiting my deductions and credits and maybe also trigger AMT maybe selling to reduce cap gains is a wash or even has negative consequences. I guess I could figure this out by running a few scenarios on turbo tax, but maybe someone knows off the top of their head. Maybe increases in AGI could be offset by making a non tax deductable to a personal IRA?

Another thought how to work this to your advantage ...

Say you own shares of SPY at profit. You sell, and re-buy in August. You are not subject to wash sale rules because those only apply to sales at a loss. You pay 15% on your gain. Now in December the Pols can't agree or secretly agree not to agree and the market tanks because Cap gains go to 20%. Because you bought SPY in August you have reset your basis, and now you have a loss. You sell on Jan 2. Now you can book a cap loss in 2012 that can be either used to offset a future cap gain in the 20% world, or be used to offset income up to 3000. Or another way to think of it is your are raising your cost basis, So any gain in the 20% world will be less than if you hold a gain through the tax increase.

I have never quite understood what the wash sales rules mean by buying a substatially similar security in a 30 day period. Obviously if you rebuy SPY in that time
frame that would violate wash sale rules. What if you bought DIA?? Would that count as wash sale? SPY and DIA are highly correlated over short time horizons.

Of course if one were sure that the market would crash, you would just sell in August and walk away. This stragegy of sell and re-buy would only be for those who want to remain invested in stocks all the time. I'm not so sure the market will crash. Congress could pull a rabbit out of its hat in the last hour, If Romney wins
will stocks soar?, Will Bennie feel safe to launch QE infinity after the elections and before the fiscal cliff?

One other question are long capital gains taxes always 15%, or are they 15% or your marginal tax rate whichever is less? I am one lay off away from long term
unemployment so 2013 may see me in the 15% bracket which would be a good time to unload gains. This might also be a good time to take a taxable distribution from a IRA too as it is counted as ordinary income. Once again I may have to break out turbo tax for some simulations. Heck of a way to raise american productivity isn't it?

[c1ue]

Re: Capital Gains Rate Increase...Sell-off?

If the various bubble stock option experiences are any indication - the decision to sell should be based on something other than taxation rates.

In particular - selling real estate isn't always a straight line. Would cutting the price 3% in order to get a faster sale result in a gain or loss overall? What happens if you get a buyer at the last minute, but then they need more time to get financing?

[dcarrigg]

Re: Capital Gains Rate Increase...Sell-off?

I thought the Capital Gains rate would rise to 20% from 15% in January; what's with the 25%? Does it include Virginia's CG rate?

You're right. Thailandnotes is also right It's complicated, as per usual. Here's what I think is going on:

The federal Capital Gains rate goes to 20% in January if nothing is done. Last time I checked, and the spreadsheet's from 5 years ago, VA was at 5.75%, making the total 25.75%. The affordable care act also tacs on a 3.8% bump for capital gains on annual AGIs over $200k ($250k if filing jointly) to pay for medicare. Then there's a 1.2% itemized deduction knock-down because of a 3% disallowance on deductions for AGIs in that range.

Put simply, if your income's over $200k or $250k if you're filing jointly, the total capital gains rate federally is probably going to 25% (moving from 15-20% when Bush tax cuts expire, from 20 to 23.8% with a high AGI because of the Affordable Care Act, then going up from 1.2% because of deduction limitations for a total of 25%) . In Thailandnotes' case, if he's in that AGI range, he'll probably end up paying 30.75%, 5.75% of which goes to VA.

That being said, December 2012 is looking like such an American political nightmare that who knows what will happen.

I know one thing. FIRE likes that rate low and they butter the bread down in D.C. I wouldn't assume a 25% rate as a foregone conclusion. But Congress is so dysfunctional, and there's an election between here and there, so Lord only knows what will happen.

[doom&gloom]

Re: Capital Gains Rate Increase...Sell-off?

My wife and I were toying with selling our house in Virginia (not our primary residence). I talked to a tax accountant today. If we sell it in 2012 the capital gains is 27,000 dollars on 200,000 dollars profit. (Without any other income, the first 70,000 in gains are exempt.) In 2013, that exemption goes away and the long-term capital gains rate increases to 25 % so the tax bill almost doubles to 50,000 dollars.

Two questions:

1.) If the capital gains tax increase remains in place, how big will the asset sell-off be in November/December, and
2.) What will happen to the rate gold profits are taxed at?

Is there some emotional reson to retain the residence? Otherwise a house is just a house. You can always buy another.