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Real estate investors have been spoiled by many factors over the last 16 years. The biggest factor has been a sustained strong economy, with only a couple minor recessions. A whole generation has grown up and entered the real estate industry without ever having experienced a major recession, like the recession of 1988 to 1992 which bankrupted almost everyone in the real estate business at the time.
Another factor which has spoiled real estate investors is the historically low long term capital gains tax rates applicable to real estate. Since 2003, long term capital gains (“LTCG”) have enjoyed a temporary tax rate cut from 20% to 15% -- the lowest rate since World War II.
Tax rates have not always been so favorable for real estate investors.
The Tax Reform Act of 1969 raised the maximum LTCG rate to 49%. This makes today’s maximum ordinary income tax rate of 35% look mild by comparison.
The 15% LTCG rate was scheduled to expire next year. Instead of letting it go back to the 20% rate which was in place from 1997 to 2003, or instead of making the 15% rate permanent, Congress and the President extended the temporary cut through 2010. If Congress and the President do not act again before 2011, the capital gains tax rate will automatically go to back to 20% in 2011. Given that the Democrats will likely remain in control of at least one house of Congress or the Presidency through 2010, it is very likely that the LTCG tax rate will revert back to 20% after 2010, or possibly go even higher.
What does this mean for your long range planning purposes?
I myself do not believe in letting the “tax tail” wag the dog. LTCG rates will likely remain favorable compared to ordinary income rates, and individual real estate investments need to be judged on their individual merits, including as they compare to non-real estate investments. But if you plan to sell a real estate investment around December 31, 2010, you are probably better off ensuring that the sale occurs before rather than after the end of 2010. And you are also probably better off selling significantly in advance of December 31, 2010, in order to avoid a time when there is apt to be a temporary excess supply of product on the market during 2010 created by investors wanting to sell by the end of the year.
For more information
Please contact Phoenix law firm, Tiffany & Bosco
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