To begin, I must make you aware that I am not an accountant or lawyer, so please seek tax advice from your consultants before moving forward with the acquisition or disposition of your investments. It’s also clear that the fiscal-cliff bill, which was drafted over a long weekend by sleep-deprived politicians and then agreed to by what seems to be two very adversarial political parties, may only be a band-aid to the current issues facing the country and leaves many big issues unresolved.
If you currently have investments or are planning to invest in 2013—whether it’s stocks, real estate, airplanes or even rare stamps—you must have an understating of capital gains tax. After all, whether you win or lose with your investments, the understanding of this convoluted part of the tax code can both soften your losses and sweeten your gains. It’s apparent that today’s debate over taxes, the fiscal cliff, the debt ceiling and who should be paying more taxes will most likely have an effect on the after-tax proceeds self-storage owners achieve when selling their property.
The New Rule
For the first time in recent history, the percentage a real estate investor will pay in federal capital gains tax will be tied to his household income. In 2013, households earning more than $400,000 ($450,000 if married and filing jointly) will see federal capital gains taxes increased from 15 percent to 20 percent. For most everyone else, capital gains tax rates would remain at 15 percent (the 0 percent rate is retained for taxpayers in the 10 percent and 15 percent tax brackets). Additionally, all capital gains taxes may now include the 3.8 percent Affordable Care Act net investment income tax also known as the Medicare Tax.
While no one likes paying higher taxes, the effects will be felt more by the higher-income earners who’ll see an across-the-board tax increase for the first time in more than 20 years. It’s worth noting, however, that a 23.8 percent capital gains tax is still in the bottom half historically, as noted in the accompanying chart. Since 1916, the capital gains tax rate has averaged 26.5 percent. With the tax increases now in place, the value of tax-deferral mechanisms, such as 1031 exchanges and cost segregation have never been greater. It’s now time to learn the new rules of the game and start developing your strategies.
The tax code has long favored investment income over the money you get in your paycheck. But today’s new tax code will leave little question to higher-income earners that investment income is more important. With federal capital gains tax rates topping out at 23.8 percent, it’s substantially lower than the top federal tax rate for ordinary income, which now sits at 39.6 percent.