Capital Gains - Where We've Been and Where We're Headed

By Timothy A. Kalberg, Shareholder, Perkins & Company, P.C.

Capital assets and the preferential tax rate on gains from the sale of qualified long-term property dates back to the Revenue Act of 1921. That groundbreaking legislation was the first time that the income tax code provided for a lower tax rate on gain recognized upon the sale of capital assets held for more than 2 years by individual taxpayers.

Since then, the marginal tax rates on long term capital gains has ranged from our current low of 15% (5% for lower income individual taxpayers) to as high as 33.8%. The holding period meanwhile has similarly moved around from as low as 6 months to as high as 2 years. Currently, the holding period for long term capital gains treatment is more than 1 year.

For 2007, the top tax rate on most long-term capital gains and qualified corporate dividends is 15%. But to the extent that these items would otherwise be taxed in the two lowest tax brackets – i.e., the 10% and 15% brackets – they are taxed at 5%. Under current tax law, the 15% rate is scheduled to maintain through 2010, while the 5% rate is scheduled to decrease to 0%, yes you read correctly, 0%, for 2008 through 2010. In 2011, long term capital gains rates return to a 20% rate for higher income taxpayers, while those lower income taxpayers would see their rate jump to 10%.

As for where we go from here, most prognosticators feel that a change is in the winds. However, we will probably see stability through the end of 2008. After that, once a new president is elected and a new Congress is in place, all bets are off. The general consensus is that preferential long term capital gains rate will wind up somewhere around 20%, and that could be as early as 2009. No indication has been made on whether or not the holding period will change, so the current 1 year period is likely to continue.

Given all the current instability in the economy and federal income tax policy, now may be a good time to sit down with your tax advisor and evaluate your options. One thing seems a relatively sure bet, we will not see any lower capital gains rates than what we are currently experiencing. Happy planning, and good luck with your crystal ball!

Tim Kalberg has been with Perkins & Company since 1988. His primary emphasis is in management advisory services, tax planning, and compliance work for small to medium-size businesses. A top industry specialist in real estate and construction matters, Tim’s commercial real estate experience includes budgeting, income and cash flow projections, lease analyses, and tax deferred exchanges. Tim can be reached at 503.221.0336.