Have you made a profit on an asset?
If you have, it is possible that you will have to pay some Capital Gains Tax (CGT). However, the rules for CGT are complicated and incorporate gains and losses, exempt items, annual allowances and multiple tax rates.
Our guide explains what Capital Gains Tax is and when you have to pay it.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit (or ‘gain’) you make when you sell or dispose of an asset. It is not just paid when you sell an asset; it is also paid when you dispose of it in other ways, such as when you:
* Give it away as a gift
* Exchange it for something else
* Transfer it to someone else (except if you are married or in a civil partnership and living together, where you can transfer assets to your spouse or civil partner with no CGT)
* Receive compensation for it (an insurance payout if it is destroyed)
You should remember that you don’t pay Capital Gains Tax on the money you receive for the asset but on the profit that you make.
Do I pay Capital Gains Tax if I make a gain on every asset?
No. There are certain items that are exempt from Capital Gains Tax and these include:
* Your main home (provided certain conditions are met)
* Your car
* PEPs or ISAs
* Lottery, pools or betting winnings
* Money on which you already pay income tax
* Personal belongings worth £6,000 or less when you sell them
How do I work out losses and capital gains?
When you sell or dispose of an asset, you need to work out the gain or loss on each asset separately. You are permitted to deduct any allowable costs associated with acquiring or disposing of the asset.
You then total up all of the individual gains and losses to work out the overall gain or loss for the tax year and the amount of tax due.
Every individual has an annual tax-free allowance for CGT, currently £10,100. This means that you only pay CGT on gains you make over £10,100 in the current tax year.
If you make a loss when you dispose of an asset, you may be able to make a claim for that loss and deduct it from other gains. If you have unused losses from earlier years – and have claimed them in time – you may be able to deduct them too.
What Capital Gains Tax rate do I pay?
For the tax years 2008-09 and 2009-10, Capital Gains Tax is charged at a flat rate of 18 per cent.
However, changes in the 2010 Budget led to the following Capital Gains Tax rates applying from 23 June 2010:
* 18 per cent and 28 per cent tax rates for individuals (the tax rate used depends on the total amount of taxable income)
* 28 per cent for trustees or for personal representatives of someone who has died
* 10 per cent for gains qualifying for Entrepreneurs’ Relief
If you normally complete a Self Assessment tax return, you report your capital gains (or losses) using the additional Capital Gains Tax pages of your tax return. If you do not self-assess, you should report your gains or losses by contacting your Tax Office.
Saturday, June 25, 2011
Friday, June 24, 2011
Capital Gains Taxes Explained
If you’ve ever made a profit on an investment, chances are you’ve paid a capital gains tax. Simply put, a capital gain is the profit an investor makes from their investment and a capital gains tax is the tax on that profit. Depending on your income tax bracket and the length of period that you held that investment, the capital gains tax on the money you made could very quickly curb your excitement over a significant return.
In fact, the capital gains tax rates are expected to increase after 2010, due in large part to the pending expiration of the Bush tax cuts from 2003. The rate applies to any investment–most commonly stocks, bonds, commodities and property–where the purchaser bought the asset at a lower price than what it is sold it for. Dividends are also eligible to be taxed as well, although at a different rate.
Here’s how you can figure out how much taxes you should be paying on your capital gains.
Capital Gains Tax Rates
First off, to know how much your profits are going to be taxed, you need to figure out how long you’ve held the investment. Long-term capital gains, which are investments that were held for a year or longer–are taxed at 15 percent in 2010 and 20 percent if the tax cuts expire. If you’re in or below the 15 percent bracket, your capital gains actually aren’t taxed in 2010, and “only” at 10 percent in 2011 and beyond.
Short-term capital gains (investments held for shorter than a year) in 2010 are taxed at your current highest tax bracket. If the cuts expire, they are taxed at your current highest tax bracket plus three percent. So if your income tax bracket is 25 percent, your short term capital gains will be taxed at 28 percent.
Keep in mind that the capital gains tax doesn’t take into effect until the profit on the asset is realized. In other words, if a stock you own goes up in value, you won’t be taxed on it until you sell it for a profit. If you like to trade stocks, you should factor in the tax implications of constantly buying and selling shares of a company or investing in it long term.
Capital Gains Tax on Property
While property is taxed the same as other investments, you can exclude up to $250,000 (or $500,000 for married couples) on the profit of the property sale if it served as your main residence in two of the last five years. If you fail to meet that requirement, you could still try for partial exclusion for special circumstances like having to relocate for work, health reasons, divorce and so on.
We’ll cover capital losses in a second, but you can’t file for a capital loss if your home was your main residence. Capital losses on property are only tax deductible if they were strictly an investment and did not serve for any personal use.
Capital Loss Deductible
While the government is more than willing to take their share of your profits, they’re also willing to help you out to cover your risks. A capital loss is the opposite of a capital gain. It’s when you sell an asset at less than what you paid for it originally, also known as your cost basis. That capital loss can be written off as a tax deduction, but the IRS allows a capital loss deduction of no more than $3,000 per year. If your losses are greater than that, you can carry it over to the following year.
Capital gains taxes only apply to the net profit an investor makes. For example, if you had two investments and one made $100 but the other one lost $80, your final taxable capital gain is only $20. To take advantage of this, many investors use what is known as tax loss harvesting. To protect their short-term gains from higher taxes, they realize their investment losses to offset the net balance. This is particularly noticeable in the month of December.
Filing Your Capital Gains Taxes
You don’t necessarily need a tax accountant to file your profits or losses if you already do your own taxes. That is, of course, if you’re just a basic investor that can keep track of your investments. Capital gains and losses are reported in a Schedule D tax form.
If you do have many complex investing strategies, or want to maximize the tax efficiency of your investments, it would be a good idea to consult an advisor. The Schedule D form can be quite complex for those unfamiliar with it and keeping track of many investments and positions can be troublesome for some.
Whether or not you need a financial professional to handle your capital gains taxes really depends on your acumen in tax filing and your activity and sophistication level as an investor. Taxes, as you probably know by now, aren’t something to play around with. Uncle Sam wants his money and he wants it on time. If you aren’t sure how your investments are going to be taxed or if you just cashed out on a major investment, it’s probably a good idea to speak to an accountant.
In fact, the capital gains tax rates are expected to increase after 2010, due in large part to the pending expiration of the Bush tax cuts from 2003. The rate applies to any investment–most commonly stocks, bonds, commodities and property–where the purchaser bought the asset at a lower price than what it is sold it for. Dividends are also eligible to be taxed as well, although at a different rate.
Here’s how you can figure out how much taxes you should be paying on your capital gains.
Capital Gains Tax Rates
First off, to know how much your profits are going to be taxed, you need to figure out how long you’ve held the investment. Long-term capital gains, which are investments that were held for a year or longer–are taxed at 15 percent in 2010 and 20 percent if the tax cuts expire. If you’re in or below the 15 percent bracket, your capital gains actually aren’t taxed in 2010, and “only” at 10 percent in 2011 and beyond.
Short-term capital gains (investments held for shorter than a year) in 2010 are taxed at your current highest tax bracket. If the cuts expire, they are taxed at your current highest tax bracket plus three percent. So if your income tax bracket is 25 percent, your short term capital gains will be taxed at 28 percent.
Keep in mind that the capital gains tax doesn’t take into effect until the profit on the asset is realized. In other words, if a stock you own goes up in value, you won’t be taxed on it until you sell it for a profit. If you like to trade stocks, you should factor in the tax implications of constantly buying and selling shares of a company or investing in it long term.
Capital Gains Tax on Property
While property is taxed the same as other investments, you can exclude up to $250,000 (or $500,000 for married couples) on the profit of the property sale if it served as your main residence in two of the last five years. If you fail to meet that requirement, you could still try for partial exclusion for special circumstances like having to relocate for work, health reasons, divorce and so on.
We’ll cover capital losses in a second, but you can’t file for a capital loss if your home was your main residence. Capital losses on property are only tax deductible if they were strictly an investment and did not serve for any personal use.
Capital Loss Deductible
While the government is more than willing to take their share of your profits, they’re also willing to help you out to cover your risks. A capital loss is the opposite of a capital gain. It’s when you sell an asset at less than what you paid for it originally, also known as your cost basis. That capital loss can be written off as a tax deduction, but the IRS allows a capital loss deduction of no more than $3,000 per year. If your losses are greater than that, you can carry it over to the following year.
Capital gains taxes only apply to the net profit an investor makes. For example, if you had two investments and one made $100 but the other one lost $80, your final taxable capital gain is only $20. To take advantage of this, many investors use what is known as tax loss harvesting. To protect their short-term gains from higher taxes, they realize their investment losses to offset the net balance. This is particularly noticeable in the month of December.
Filing Your Capital Gains Taxes
You don’t necessarily need a tax accountant to file your profits or losses if you already do your own taxes. That is, of course, if you’re just a basic investor that can keep track of your investments. Capital gains and losses are reported in a Schedule D tax form.
If you do have many complex investing strategies, or want to maximize the tax efficiency of your investments, it would be a good idea to consult an advisor. The Schedule D form can be quite complex for those unfamiliar with it and keeping track of many investments and positions can be troublesome for some.
Whether or not you need a financial professional to handle your capital gains taxes really depends on your acumen in tax filing and your activity and sophistication level as an investor. Taxes, as you probably know by now, aren’t something to play around with. Uncle Sam wants his money and he wants it on time. If you aren’t sure how your investments are going to be taxed or if you just cashed out on a major investment, it’s probably a good idea to speak to an accountant.
Thursday, June 23, 2011
Effects of Capital Gains Tax and Interest Rates on Owner’s Net
TIMING… WHEN SELLING A COMPANY, it's not how high the sell price as how much the owner "pockets". There are a number of important considerations facing business owners who are considering transitioning in today’s markets. Two of the most important and clearly quantifiable are the proposed increases in capital gains tax rates and interest rates. But just how significant are these?
Let’s look at the impact on your business’ “value” if capital gains rates go to 30% from their current level of 15% as well as interest rate increases of 2%, 4% and 6%.
Value is typically defined as Business Enterprise Value—the amount that an expert values a company— or Market Value—what the open market will pay for a company. For purposes of illustrating the effects of an increase in capital gains tax and interest rates, we’re defining value as the combination of the decrease in sales proceeds received by an owner due to an increase in capital gains tax along with the decrease in purchasing power of the buying market from an increase in interest rates.
Capital Gains Tax Rates
Many think that capital gains taxes are likely to increase soon. Federal capital gains taxes were reduced from 28% then to 20% and at last to 15%. Given the current climate in theWhite House, it is quite possible, some say quite likely, that the capital gains tax will increase. That means your company will need to sell for a lot more to net the same amount.Interest RatesWill Rise
Buyers tend to pay more when the cost of money is low. Lower interest rates make growth by acquisition a more attractive option than organic growth. Quite simply – the lower the cost of money (interest rates), the more a buyer can pay for your company.Let’s look at the impact on your business’ “value” if capital gains rates go to 30% from their current level of 15% as well as interest rate increases of 2%, 4% and 6%.
% Decline in Business Value
Resulting from Capital Gains Tax and Interest Rate Increases
A capital gains increase of 15% will result in a decrease in your net proceeds of 15.0%. Add to that
an interest rate increase of 6% and your business’ “value” will decrease 30.8%.
Many business owners have suffered earnings declines related to the current recession and believe that a wait-and-see strategy is best. However, many economists are predicting a bath tub-shaped recovery, which means we are likely to see very little real growth for several years once the recession is over. Let’s look at what kind of earnings growth would be required to simply offset the loss in value from capital gains and interest rates.Resulting from Capital Gains Tax and Interest Rate Increases
A capital gains increase of 15% will result in a decrease in your net proceeds of 15.0%. Add to that
an interest rate increase of 6% and your business’ “value” will decrease 30.8%.
% Increase in Annual Earnings to Offset Decrease in Business Value
from Capital Gains and Interest Rate Increases
Your annual earnings would have to increase 11.4% each year to just offset a 15% increase in
capital gains increase and 20.2% to offset the capital gains and a 6% interest rate increase!
from Capital Gains and Interest Rate Increases
Your annual earnings would have to increase 11.4% each year to just offset a 15% increase in
capital gains increase and 20.2% to offset the capital gains and a 6% interest rate increase!
| Bottom line, there is a significant amount of real money, your money, at stake here. The Transition Companies can work with you to accomplish your capitalization or exit needs and provide business optimization expertise to help you immediately improve your earnings. To get the most money for your business and the best terms and conditions, all you need to do is start the process! Why risk decades of hard work and significant loss of value by waiting? |
|
Wednesday, June 22, 2011
Who Qualifies for the Zero Percent Capital Gains Tax Rate?
With all the political discussion surrounding last December's legislation extending tax cuts, a lot of people find themselves confused on just what this means for them, particularly in terms of capital gains taxes. So thanks for your question.
Since 2008, investors have been enjoying more favorable long-term capital gains tax rates: zero percent for investors in the 15% or lower tax bracket; 15% for those in the 25% tax bracket or higher. These rates were scheduled to go up after the end of 2010, but new legislation extended them for another two years, through 2012. For the record, long-term capital gains rates apply to profits made on investments held for more than one year. (Profits on investments held for one year or less are taxed as ordinary income.)
Long-term capital gains are added to regular income to determine if the zero percent rate applies. For tax year 2010, that means single taxpayers will pay tax at a 0% rate for long-term capital gains that fall into the income range of $34,000 or less ($68,00 for married taxpayers filing jointly). Long-term capital gain income added over those thresholds is taxed at the higher rate. These taxable income levels go up to $34,500 and $69,000 respectively in 2011.
That all seems pretty straightforward. But the confusion can come in how the capital gains you realize affect your taxable income. I'll try to clarify a bit.
Factoring your capital gains into your taxable income
Your question concerns a family making less than $68,000 a year. And while you're correct that $68,000 is the highest 2010 income level in the 15% tax bracket for married filing jointly, it's your taxable income—not just how much you make—that determines what tax bracket you fall into.
You taxable income is your total gross income minus allowable personal exemptions and deductions. Gross income includes both earned income (salary, wages, tips, commissions, bonuses, unemployment benefits and sick pay) and unearned income (dividends, interest, and the profit you make when you sell an investment—your capital gain).
So if you actually make $68,000 a year, and then sell some long-term investments at a profit, you have to add your capital gains earnings to that total. You'd then subtract your exemptions and deductions to arrive at your taxable income. For 2010, if you come in under $68,000 you wouldn't have to pay capital gains taxes. Any amount over that threshold would be taxed at the higher rate.
Adding in state taxes
So far we've been talking about federal capital gains taxes. But many people don't realize that they also may be subject to state capital gains taxes. While most states define capital gains in the same way that the federal government does, states don't have to follow federal regulations on taxing capital gains.
Currently, only a few states have specific tax rates for capital gains. However—and this is the important point—if you live in a state that has state income taxes, long-term capital gains are more often than not treated the same as ordinary income. So while you might be able to avoid paying federal capital gains taxes, your state income tax bill may go up when you pocket some capital gains on your investments regardless of whether they're long- or short-term.
Tax laws vary by state and several states have exceptions and exclusions for various types of capital gains, so best to talk to your accountant or tax advisor to get the complete picture for your state.
Taking advantage of today's rates
Today's low capital gains tax rates can be a real boon for lower income taxpayers who otherwise need to cash in on investments that have appreciated. This could be especially valuable to retirees. Also, higher income taxpayers can use this as an opportunity to gift appreciated stock to a lower earning adult child or grandchild who might then be able to sell the stock and avoid the capital gains tax.
However, taxes—both federal and state—can quickly become very complicated. And it seldom makes sense to take investment action based solely on tax consequences. So before you make any selling decisions, I strongly recommend checking in with a tax professional. Realizing capital gains now may seem like a good idea—but keeping as much gain as you can in your pocket is an even better one.
Since 2008, investors have been enjoying more favorable long-term capital gains tax rates: zero percent for investors in the 15% or lower tax bracket; 15% for those in the 25% tax bracket or higher. These rates were scheduled to go up after the end of 2010, but new legislation extended them for another two years, through 2012. For the record, long-term capital gains rates apply to profits made on investments held for more than one year. (Profits on investments held for one year or less are taxed as ordinary income.)
Long-term capital gains are added to regular income to determine if the zero percent rate applies. For tax year 2010, that means single taxpayers will pay tax at a 0% rate for long-term capital gains that fall into the income range of $34,000 or less ($68,00 for married taxpayers filing jointly). Long-term capital gain income added over those thresholds is taxed at the higher rate. These taxable income levels go up to $34,500 and $69,000 respectively in 2011.
That all seems pretty straightforward. But the confusion can come in how the capital gains you realize affect your taxable income. I'll try to clarify a bit.
Factoring your capital gains into your taxable income
Your question concerns a family making less than $68,000 a year. And while you're correct that $68,000 is the highest 2010 income level in the 15% tax bracket for married filing jointly, it's your taxable income—not just how much you make—that determines what tax bracket you fall into.
You taxable income is your total gross income minus allowable personal exemptions and deductions. Gross income includes both earned income (salary, wages, tips, commissions, bonuses, unemployment benefits and sick pay) and unearned income (dividends, interest, and the profit you make when you sell an investment—your capital gain).
So if you actually make $68,000 a year, and then sell some long-term investments at a profit, you have to add your capital gains earnings to that total. You'd then subtract your exemptions and deductions to arrive at your taxable income. For 2010, if you come in under $68,000 you wouldn't have to pay capital gains taxes. Any amount over that threshold would be taxed at the higher rate.
Adding in state taxes
So far we've been talking about federal capital gains taxes. But many people don't realize that they also may be subject to state capital gains taxes. While most states define capital gains in the same way that the federal government does, states don't have to follow federal regulations on taxing capital gains.
Currently, only a few states have specific tax rates for capital gains. However—and this is the important point—if you live in a state that has state income taxes, long-term capital gains are more often than not treated the same as ordinary income. So while you might be able to avoid paying federal capital gains taxes, your state income tax bill may go up when you pocket some capital gains on your investments regardless of whether they're long- or short-term.
Tax laws vary by state and several states have exceptions and exclusions for various types of capital gains, so best to talk to your accountant or tax advisor to get the complete picture for your state.
Taking advantage of today's rates
Today's low capital gains tax rates can be a real boon for lower income taxpayers who otherwise need to cash in on investments that have appreciated. This could be especially valuable to retirees. Also, higher income taxpayers can use this as an opportunity to gift appreciated stock to a lower earning adult child or grandchild who might then be able to sell the stock and avoid the capital gains tax.
However, taxes—both federal and state—can quickly become very complicated. And it seldom makes sense to take investment action based solely on tax consequences. So before you make any selling decisions, I strongly recommend checking in with a tax professional. Realizing capital gains now may seem like a good idea—but keeping as much gain as you can in your pocket is an even better one.
Tuesday, June 21, 2011
Capital Gains: It's a Brave New World
The good news about the capital gains tax cut is that every property will experience a lower capital gains tax rate. The bad news is that the effective capital gains tax rate could vary by up to almost 5 percentage points from property to property.
The complicating factor that Congress placed into capital gains tax relief for real estate is the differing tax rates for real and depreciation recapture capital gains-20 percent and 25 percent, respectively. (Real capital gain is the profit-the sales price above the original purchase price. Recapture capital gain is the cumulative depreciation subtracted from operating income for the years a property was in operation.) The capital gains tax law also increased the holding period from 12 months to 18 months.
Previously, Section 1250 of the Internal Revenue Code applied the same tax rate, 28 percent, to real and recapture gain. Consequently, the effective capital gains tax rate was equal for all asset categories. Under the new rules, the effective tax rate for real estate will be a blended rate of between the 20 percent real gain tax rate and the 25 percent recapture tax rate. However, since other asset categories such as stocks and bonds are not subject to recapture, their capital gains tax rate of 20 percent always will be lower than real estate.
The National Association of Realtors (NAR), in close consultation with the Commercial Investment Real Estate Institute, spent more than $1 million in an intense lobbying and grass-roots effort to maintain parity between real and recapture capital gains tax rates. Although NAR was unsuccessful in achieving equal treatment for real estate assets, the 3 percentage point reduction in recapture capital gain will save the industry $3 billion in capital gains taxes. The reduction in the recapture gain rate from 28 percent to 25 percent represents a 10.7 percent decline.
How will the differing capital gains tax rates affect real estate? The question can be answered by examining three scenarios: fully depreciated property with small real gain; partially depreciated property with significant real gain; and newly acquired property with little depreciation and strong appreciation (see chart).
Each scenario assumes a purchase price of $1 million. In scenario 1, a property held on a long-term basis that experienced little appreciation and is fully depreciated would have the highest blended tax rate of 24.5 percent. The high blended rate would be close to the recapture capital gains tax rate due to the lack of appreciation. Unfortunately, data compiled by the National Real Estate Index reveals that properties purchased in 1985 and sold in 1996 have appreciated by only 2 percent. Due to this low level of appreciation, buildings purchased during the pricing peaks of the mid-1980s are unlikely to experience tax relief significantly greater than the 25 percent recapture capital gains tax rate.
Scenario 2 assumes equal depreciation and appreciation of $250,000. Under this scenario, the blended tax rate would be 22.8 percent. This rate reflects a significant reduction from the previous rate of 28 percent.
Scenario 3 represents a building purchased two years ago that has undergone a dramatic increase in value due to low purchase price and very strong price appreciation. The low level of depreciation is based on a two-year hold. In this example, the 20.5 percent blended tax rate is close to the real gain tax rate paid by stocks and bonds.
From scenario 1 to 3, there is a 4 percentage point differential in the blended tax rate. This large differential shows the growing role that tax planning will have in future purchase and sales decisions. Generally, the new recapture tax scheme favors shorter-held assets because they are subject to the higher 39-year tax depreciation schedule, which results in a lower recapture tax burden. However, strong price appreciation lowers the blended tax rate for all ownership tenures.
This analysis has addressed only the 20 percent real gain tax bracket. Special rules that become effective after December 31, 2000, will provide 18 percent real capital gains rate (8 percent in the 15 percent bracket) for assets held five years or longer. However, no property sold before January 1, 2006, will qualify for the 18 percent rate.
Despite the complexity of the new capital gains tax rules, property owners will benefit across the board from lower capital gains liability. Mastering the new capital gains tax law will position commercial real estate professionals to become direct beneficiaries of the increased transaction volume that lower capital gains tax rates should generate.
Capital Gains' Effect on Real Estate
Characteristic Scenario 1 Scenario 2 Scenario 3
Purchase price $1,000,000 $1,000,000 $1,000,000
Sales price $1,100,000 $1,250,000 $1,500,000
Real gain $100,000 $250,000 $500,000
Real gain tax rate 20.0% 20.0% 20.0%
Real gain taxes $20,000 $50,000 $100,000
Recapture gain* $800,000 $250,000 $41,026
Recapture tax rate 25.0% 25.0% 25.0%
Recapture taxes $200,000 $62,500 $10,256
Blended tax rate** 24.5% 22.8% 20.5%
* Recapture gain equals cumulative depreciation.
** The blended tax rate is calculated by the formula [(recapture rate x recapture taxes) + (real gain tax rate x real gain taxes)]/(recapture taxes + real gain taxes).
The complicating factor that Congress placed into capital gains tax relief for real estate is the differing tax rates for real and depreciation recapture capital gains-20 percent and 25 percent, respectively. (Real capital gain is the profit-the sales price above the original purchase price. Recapture capital gain is the cumulative depreciation subtracted from operating income for the years a property was in operation.) The capital gains tax law also increased the holding period from 12 months to 18 months.
Previously, Section 1250 of the Internal Revenue Code applied the same tax rate, 28 percent, to real and recapture gain. Consequently, the effective capital gains tax rate was equal for all asset categories. Under the new rules, the effective tax rate for real estate will be a blended rate of between the 20 percent real gain tax rate and the 25 percent recapture tax rate. However, since other asset categories such as stocks and bonds are not subject to recapture, their capital gains tax rate of 20 percent always will be lower than real estate.
The National Association of Realtors (NAR), in close consultation with the Commercial Investment Real Estate Institute, spent more than $1 million in an intense lobbying and grass-roots effort to maintain parity between real and recapture capital gains tax rates. Although NAR was unsuccessful in achieving equal treatment for real estate assets, the 3 percentage point reduction in recapture capital gain will save the industry $3 billion in capital gains taxes. The reduction in the recapture gain rate from 28 percent to 25 percent represents a 10.7 percent decline.
How will the differing capital gains tax rates affect real estate? The question can be answered by examining three scenarios: fully depreciated property with small real gain; partially depreciated property with significant real gain; and newly acquired property with little depreciation and strong appreciation (see chart).
Each scenario assumes a purchase price of $1 million. In scenario 1, a property held on a long-term basis that experienced little appreciation and is fully depreciated would have the highest blended tax rate of 24.5 percent. The high blended rate would be close to the recapture capital gains tax rate due to the lack of appreciation. Unfortunately, data compiled by the National Real Estate Index reveals that properties purchased in 1985 and sold in 1996 have appreciated by only 2 percent. Due to this low level of appreciation, buildings purchased during the pricing peaks of the mid-1980s are unlikely to experience tax relief significantly greater than the 25 percent recapture capital gains tax rate.
Scenario 2 assumes equal depreciation and appreciation of $250,000. Under this scenario, the blended tax rate would be 22.8 percent. This rate reflects a significant reduction from the previous rate of 28 percent.
Scenario 3 represents a building purchased two years ago that has undergone a dramatic increase in value due to low purchase price and very strong price appreciation. The low level of depreciation is based on a two-year hold. In this example, the 20.5 percent blended tax rate is close to the real gain tax rate paid by stocks and bonds.
From scenario 1 to 3, there is a 4 percentage point differential in the blended tax rate. This large differential shows the growing role that tax planning will have in future purchase and sales decisions. Generally, the new recapture tax scheme favors shorter-held assets because they are subject to the higher 39-year tax depreciation schedule, which results in a lower recapture tax burden. However, strong price appreciation lowers the blended tax rate for all ownership tenures.
This analysis has addressed only the 20 percent real gain tax bracket. Special rules that become effective after December 31, 2000, will provide 18 percent real capital gains rate (8 percent in the 15 percent bracket) for assets held five years or longer. However, no property sold before January 1, 2006, will qualify for the 18 percent rate.
Despite the complexity of the new capital gains tax rules, property owners will benefit across the board from lower capital gains liability. Mastering the new capital gains tax law will position commercial real estate professionals to become direct beneficiaries of the increased transaction volume that lower capital gains tax rates should generate.
Capital Gains' Effect on Real Estate
Characteristic Scenario 1 Scenario 2 Scenario 3
Purchase price $1,000,000 $1,000,000 $1,000,000
Sales price $1,100,000 $1,250,000 $1,500,000
Real gain $100,000 $250,000 $500,000
Real gain tax rate 20.0% 20.0% 20.0%
Real gain taxes $20,000 $50,000 $100,000
Recapture gain* $800,000 $250,000 $41,026
Recapture tax rate 25.0% 25.0% 25.0%
Recapture taxes $200,000 $62,500 $10,256
Blended tax rate** 24.5% 22.8% 20.5%
* Recapture gain equals cumulative depreciation.
** The blended tax rate is calculated by the formula [(recapture rate x recapture taxes) + (real gain tax rate x real gain taxes)]/(recapture taxes + real gain taxes).
Monday, June 20, 2011
Amendments to capital gains tax rate and increased cost to the investment holder
After the UK general election in 2010 the collation government was formed. The two parties Liberals and conservatives joined together, the David Cameron as leader, Nick Clegg as Deputy and George Osborne as the new chancellor .
Several countries within the EU, specifically Portugal, Ireland, Greece and Spain have experienced the effects of not reducing their budget deficit. The United Kingdom was keen to ensure that this did not happen to them. As a consequence the new government introduced authority plans in the emergency budget and a complete review of spending.
There were far reaching changes to the UK tax system and spending plans. Reports initially indicated that Capital Gains tax would be brought into line with income tax. This provoked a number of concerns as it could have meant a significant rise in the CGT rate from 18% to 50% for high earners.
The CGt annual allowance of 10,200 was retained. It was confirmed that any gains should be added to income to decide the level of CGT payable. This was a change to the way CGt was calculated compared to the previous method.
Part of the change meant that basic rate taxpayers could pay the higher rate 28% if the gain when added put them into the higher rate tax bracket.
For many people the main issue relating to large capital gains relates to commercial or residential property they own. Unfortunately if you do have a large CGt bill and you are looking to sell the property investments , then the only option is to pay the tax. Of course capital gains tax is only paid when a gain is made. If you do not sell the asset then no gain is made. However this could cause issues with Inheritance tax if you hold the asset until death. However if the gain is in respect of other assets then careful tax planning could help and even wipe out any possible gain. However this is only part of the problem. To ensure that the issue with CGt does not happen again then investors should consider using tax efficient investments within their financial plans.
Tax can be a difficult area to work out. Always seek advice from professionally qualified people. Ask about the qualifications they hold and their fees for the proposed work. The internet is a good source of information and can help you find the right person.
Consilium Asset Management Investment Process
If you are perplexed with the most recent capital gains tax rates and you are trying to reduce your own CGT bill speak to your nearby ifa. They are able to explain Capital gains tax and how to lower your tax bill.
Several countries within the EU, specifically Portugal, Ireland, Greece and Spain have experienced the effects of not reducing their budget deficit. The United Kingdom was keen to ensure that this did not happen to them. As a consequence the new government introduced authority plans in the emergency budget and a complete review of spending.
There were far reaching changes to the UK tax system and spending plans. Reports initially indicated that Capital Gains tax would be brought into line with income tax. This provoked a number of concerns as it could have meant a significant rise in the CGT rate from 18% to 50% for high earners.
The CGt annual allowance of 10,200 was retained. It was confirmed that any gains should be added to income to decide the level of CGT payable. This was a change to the way CGt was calculated compared to the previous method.
Part of the change meant that basic rate taxpayers could pay the higher rate 28% if the gain when added put them into the higher rate tax bracket.
For many people the main issue relating to large capital gains relates to commercial or residential property they own. Unfortunately if you do have a large CGt bill and you are looking to sell the property investments , then the only option is to pay the tax. Of course capital gains tax is only paid when a gain is made. If you do not sell the asset then no gain is made. However this could cause issues with Inheritance tax if you hold the asset until death. However if the gain is in respect of other assets then careful tax planning could help and even wipe out any possible gain. However this is only part of the problem. To ensure that the issue with CGt does not happen again then investors should consider using tax efficient investments within their financial plans.
Tax can be a difficult area to work out. Always seek advice from professionally qualified people. Ask about the qualifications they hold and their fees for the proposed work. The internet is a good source of information and can help you find the right person.
Consilium Asset Management Investment Process
If you are perplexed with the most recent capital gains tax rates and you are trying to reduce your own CGT bill speak to your nearby ifa. They are able to explain Capital gains tax and how to lower your tax bill.
Sunday, June 19, 2011
What Is the Capital Gains Tax Rate on the Sale of a Home?
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Overview
tax forms image by Chad McDermott from Fotolia.com
tax forms image by Chad McDermott from Fotolia.com
Taxpayers can take advantage of a significant exemption on capital gains realized from the sale of a home.
b69b2783-1721-9398-2c77-339a1c293ee7300400
A capital gain is a profit that you realize on the sale of an asset, such as a home. By the federal tax code, "short-term" capital gains are those realized on assets held for a year or less, while "long-term" gains are realized on assets held for longer than a year. The current federal tax rate on short-term gains is identical to your income tax rate. For long-term gains, the capital gains rate depends on your tax bracket. For the 10 and 15 percent brackets, there is no tax on long-term gains. For higher brackets, the rate is 15 percent. These rates may change after 2010, when tax cuts enacted by the Bush administration are due to expire. There is also a significant exemption on capital gain amounts for a principal residence.
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Exemptions
By the Taxpayer Relief Act of 1997, the federal tax code allows an exemption of up to $250,000 of capital gains for singles--up to $500,000 for married couples--on the sale of a principal residence. This means that there is no federal income tax levied on a gain of any amount up to and including these amounts when you sell your home.
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Figuring the Gain
The gain is measured by subtracting the original “cost basis” (purchase price plus all buying and selling fees, and home improvements) from the selling price of the home. It is reported with your federal tax return on IRS Schedule D, Capital Gains and Losses. There are separate sections on the form for reporting short-term and long-term gains. There is no deduction available if you lost money on the sale.
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History
Prior to 1997, home sellers could only exclude a gain if they used it to buy another and more expensive residence within 2 years of the original sale. Those aged 55 or older had a one-time exemption of up to $125,000 available.
*
Principal Residence
The current law applies to all home sales occurring since the law was passed in 1997. It can be used an unlimited number of times. The property sold must be your principal residence, meaning you have lived in it at least 2 years (consecutive or not) out of the last 5 years before the sale takes place. For investment or rental property that you own, the normal capital gains tax rate applies, without exemptions.
*
Partial Exemption
If you don’t meet the principal residence test, you may still qualify for a partial exemption if you were forced to sell because of a job move or a new job, if you had health issues that made it necessary to move, or for natural disasters or other circumstances that you could not foresee. You must be prepared to document these circumstances if the IRS questions the exemption.
*
State Taxes
In California, capital gains on the sale of a home are included in your income and taxed at whatever tax rate is appropriate to your tax bracket. Currently, these rates vary from 1 to 9.3 percent of income.
Overview
tax forms image by Chad McDermott from Fotolia.com
tax forms image by Chad McDermott from Fotolia.com
Taxpayers can take advantage of a significant exemption on capital gains realized from the sale of a home.
b69b2783-1721-9398-2c77-339a1c293ee7300400
A capital gain is a profit that you realize on the sale of an asset, such as a home. By the federal tax code, "short-term" capital gains are those realized on assets held for a year or less, while "long-term" gains are realized on assets held for longer than a year. The current federal tax rate on short-term gains is identical to your income tax rate. For long-term gains, the capital gains rate depends on your tax bracket. For the 10 and 15 percent brackets, there is no tax on long-term gains. For higher brackets, the rate is 15 percent. These rates may change after 2010, when tax cuts enacted by the Bush administration are due to expire. There is also a significant exemption on capital gain amounts for a principal residence.
*
Exemptions
By the Taxpayer Relief Act of 1997, the federal tax code allows an exemption of up to $250,000 of capital gains for singles--up to $500,000 for married couples--on the sale of a principal residence. This means that there is no federal income tax levied on a gain of any amount up to and including these amounts when you sell your home.
*
Figuring the Gain
The gain is measured by subtracting the original “cost basis” (purchase price plus all buying and selling fees, and home improvements) from the selling price of the home. It is reported with your federal tax return on IRS Schedule D, Capital Gains and Losses. There are separate sections on the form for reporting short-term and long-term gains. There is no deduction available if you lost money on the sale.
*
History
Prior to 1997, home sellers could only exclude a gain if they used it to buy another and more expensive residence within 2 years of the original sale. Those aged 55 or older had a one-time exemption of up to $125,000 available.
*
Principal Residence
The current law applies to all home sales occurring since the law was passed in 1997. It can be used an unlimited number of times. The property sold must be your principal residence, meaning you have lived in it at least 2 years (consecutive or not) out of the last 5 years before the sale takes place. For investment or rental property that you own, the normal capital gains tax rate applies, without exemptions.
*
Partial Exemption
If you don’t meet the principal residence test, you may still qualify for a partial exemption if you were forced to sell because of a job move or a new job, if you had health issues that made it necessary to move, or for natural disasters or other circumstances that you could not foresee. You must be prepared to document these circumstances if the IRS questions the exemption.
*
State Taxes
In California, capital gains on the sale of a home are included in your income and taxed at whatever tax rate is appropriate to your tax bracket. Currently, these rates vary from 1 to 9.3 percent of income.
Saturday, June 18, 2011
New Capital Gains Tax Rate for 2010, 2011
Almost everything you own and use for personal or investment purposes is a capital asset. Your home, your furniture, stocks, or bonds held in a personal account are all examples of assets. A capital gain is the profit you made above and beyond the base price you paid for the item when you purchased it.
Once you know the dollar amount of your capital gain, you will want to know what your capital gains tax rate will be. First of all, you have to classify it as a long-term capital gain or a short-term capital gain. Short-term capital gains are profits made from the sale of an item held for less than a year. Long-term capital gains are profits made from the sale of an item held for one year or longer.
Capital Gains and Capital Losses
Capital gains and deductible capital losses are reported on Form 1040, Schedule D. At this time, net capital gains tax rates are set at 15%. The "net capital gain" is the amount of the gain that is leftover after capital losses have been subtracted. Some of these calculations pertain to short-term and long-term capital gains and losses, so be careful when calculating capital gains tax rates.
If these rates are calculated incorrectly, it's like a big red flag waving to the IRS for an audit. There are some capital gains tax rates that were lowered from 2008 through 2010, but you'll have to refer to Publication 550 from the IRS web site for specifics. This is one area of taxes that can get pretty tricky; the depth of some of this information goes beyond the scope of this article.
Three Exceptions to Lower Capital Gains Tax Rates
1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate
2. If coins, art, or other collectibles are sold, the net capital gains are taxed at a maximum 28% rate
3. Net capital gains from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum rate of 25%
Some taxable capital gains will require you to make estimated tax payments. See articles on tax withholding or estimated tax payments for more information.
Capital Gains Tax Rates:
* (28%)Collectibles (work of art, rug, antique, gold, silver, gems, stamps and others)
* (28%)Eligible gain on qualified small business stock minus the Section 1202 exclusion this one.
* (25%)Unrecaptured Section 1250 gain.
* (15%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or higher .
* (0%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or lower.
Maximum Capital Gains Rates
The Capital Gain Tax Worksheet (Schedule D) will help you figure your tax if you have net capital gain. Make sure you understand whether you should use the capital gains worksheet or the qualified dividends worksheet. Keep in mind, your capital losses can be amended on a previous tax return or put on a future tax return. There are numerical limits on claiming capital losses, so keep up to date on those figures as they change from year to year.
More Information and Guidance
If trying to keep all of this information in order makes your head swirl, help is right in front of you. Your computer is the tool you need to help you with your capital gains tax rates. I suggest using an online tax preparation software company to help you prepare your tax return accurately. A lot of audits can be triggered because of a lack of knowledge in this area of taxation. By using tax software, the taxpayer will be warned if something looks like it may trigger an audit.
Don't take a chance on sending in a tax return with errors. Calculating the correct capital gains tax rate can be complicated and confusing. Let the tax software do all of the hard work for you. Their tax experts stay up to date on the new tax laws and tax rates all year long. They know what property qualifies for what rate and whether you qualify for a lower rate or not.
Once you know the dollar amount of your capital gain, you will want to know what your capital gains tax rate will be. First of all, you have to classify it as a long-term capital gain or a short-term capital gain. Short-term capital gains are profits made from the sale of an item held for less than a year. Long-term capital gains are profits made from the sale of an item held for one year or longer.
Capital Gains and Capital Losses
Capital gains and deductible capital losses are reported on Form 1040, Schedule D. At this time, net capital gains tax rates are set at 15%. The "net capital gain" is the amount of the gain that is leftover after capital losses have been subtracted. Some of these calculations pertain to short-term and long-term capital gains and losses, so be careful when calculating capital gains tax rates.
If these rates are calculated incorrectly, it's like a big red flag waving to the IRS for an audit. There are some capital gains tax rates that were lowered from 2008 through 2010, but you'll have to refer to Publication 550 from the IRS web site for specifics. This is one area of taxes that can get pretty tricky; the depth of some of this information goes beyond the scope of this article.
Three Exceptions to Lower Capital Gains Tax Rates
1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate
2. If coins, art, or other collectibles are sold, the net capital gains are taxed at a maximum 28% rate
3. Net capital gains from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum rate of 25%
Some taxable capital gains will require you to make estimated tax payments. See articles on tax withholding or estimated tax payments for more information.
Capital Gains Tax Rates:
* (28%)Collectibles (work of art, rug, antique, gold, silver, gems, stamps and others)
* (28%)Eligible gain on qualified small business stock minus the Section 1202 exclusion this one.
* (25%)Unrecaptured Section 1250 gain.
* (15%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or higher .
* (0%)"Other Gain" (not including those mentioned above) and the regular tax rate that would apply is 25% or lower.
Maximum Capital Gains Rates
The Capital Gain Tax Worksheet (Schedule D) will help you figure your tax if you have net capital gain. Make sure you understand whether you should use the capital gains worksheet or the qualified dividends worksheet. Keep in mind, your capital losses can be amended on a previous tax return or put on a future tax return. There are numerical limits on claiming capital losses, so keep up to date on those figures as they change from year to year.
More Information and Guidance
If trying to keep all of this information in order makes your head swirl, help is right in front of you. Your computer is the tool you need to help you with your capital gains tax rates. I suggest using an online tax preparation software company to help you prepare your tax return accurately. A lot of audits can be triggered because of a lack of knowledge in this area of taxation. By using tax software, the taxpayer will be warned if something looks like it may trigger an audit.
Don't take a chance on sending in a tax return with errors. Calculating the correct capital gains tax rate can be complicated and confusing. Let the tax software do all of the hard work for you. Their tax experts stay up to date on the new tax laws and tax rates all year long. They know what property qualifies for what rate and whether you qualify for a lower rate or not.
Friday, June 17, 2011
The annual tax-free allowance and Capital Gains Tax rates
Before you can work out your Capital Gains Tax you'll need to know what the annual tax-free allowance is and what tax rate to use. See the page in this guide on working out Capital Gains Tax for an overview of working out a gain or loss.
The annual tax-free allowance
Each tax year nearly everyone who is liable to Capital Gains Tax gets an annual tax-free allowance - known as the 'Annual Exempt Amount'.
The Annual Exempt Amount for tax year 2008-09 is:
* £9,600 for each individual
* £4,800 for most trustees
These amounts have increased for 2009-10 - see the 'Tax-free allowances' link below for more information on this.
If your overall gains for the tax year are above the Annual Exempt Amount, you'll pay Capital Gains Tax on the excess.
If your overall gains are below the Annual Exempt Amount, you won't pay Capital Gains Tax.
Find out about Capital Gains Tax rates and annual tax-free allowances on the HM Revenue & Customs (HMRC) website - Opens in a new window.
Example - using the Annual Exempt Amount
Your overall gain in 2008-09 is £18,000.
The Annual Exempt Amount is £9,600.
You'll pay Capital Gains Tax on the excess of £8,400 (£18,000 - £9,600).
Capital Gains Tax rates
For 2008-09 and later years, Capital Gains Tax is charged at a flat rate of 18 per cent.
Different rates applied for tax years before 2008-09.
The annual tax-free allowance
Each tax year nearly everyone who is liable to Capital Gains Tax gets an annual tax-free allowance - known as the 'Annual Exempt Amount'.
The Annual Exempt Amount for tax year 2008-09 is:
* £9,600 for each individual
* £4,800 for most trustees
These amounts have increased for 2009-10 - see the 'Tax-free allowances' link below for more information on this.
If your overall gains for the tax year are above the Annual Exempt Amount, you'll pay Capital Gains Tax on the excess.
If your overall gains are below the Annual Exempt Amount, you won't pay Capital Gains Tax.
Find out about Capital Gains Tax rates and annual tax-free allowances on the HM Revenue & Customs (HMRC) website - Opens in a new window.
Example - using the Annual Exempt Amount
Your overall gain in 2008-09 is £18,000.
The Annual Exempt Amount is £9,600.
You'll pay Capital Gains Tax on the excess of £8,400 (£18,000 - £9,600).
Capital Gains Tax rates
For 2008-09 and later years, Capital Gains Tax is charged at a flat rate of 18 per cent.
Different rates applied for tax years before 2008-09.
Thursday, June 16, 2011
Capital Gains Tax Rates -- Long-Term and Short-Term Capital Gains Tax Rates
The capital gains tax rates are determined by the type of investment asset and the holding period of the asset.
In additional to the federal capital gains tax rates, your capital gains will also be subject to state income taxes. Many states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income taxes rates.
Tax Rate on Short-Term Capital Gains
Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.
Tax Rate on Long-Term Capital Gains
Capital gain income from assets held longer than one year are generally taxed at a special long-term capital gains rate. The rate that applies depends on which ordinary income tax bracket you fall under.
* Zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets.
* 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.
Tax Rate on Dividend Income
Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at your ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at a 15% percent rate. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." (Publication 550.)
Tax Rate on Collectible Assets
Collectibles held longer than one year are taxed at a 28% rate. Short-term gains on collectibles are taxed at the ordinary income tax rates.
Tax Rate on Recaptured Depreciation of Real Property
Real property that has been depreciated is subject to a special depreciation recapture tax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. The remainder of the gain will be ordinary or long-term gains, depending on how long the property was held.
Planning Ahead for 2013
The special tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the tax rate on long-term gains will be 20% (or 10% if a taxpayer is in the fifteen percent tax bracket). Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates.
In additional to the federal capital gains tax rates, your capital gains will also be subject to state income taxes. Many states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income taxes rates.
Tax Rate on Short-Term Capital Gains
Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.
Tax Rate on Long-Term Capital Gains
Capital gain income from assets held longer than one year are generally taxed at a special long-term capital gains rate. The rate that applies depends on which ordinary income tax bracket you fall under.
* Zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets.
* 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.
Tax Rate on Dividend Income
Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at your ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at a 15% percent rate. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." (Publication 550.)
Tax Rate on Collectible Assets
Collectibles held longer than one year are taxed at a 28% rate. Short-term gains on collectibles are taxed at the ordinary income tax rates.
Tax Rate on Recaptured Depreciation of Real Property
Real property that has been depreciated is subject to a special depreciation recapture tax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. The remainder of the gain will be ordinary or long-term gains, depending on how long the property was held.
Planning Ahead for 2013
The special tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the tax rate on long-term gains will be 20% (or 10% if a taxpayer is in the fifteen percent tax bracket). Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates.
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