Written by Patty Flowers. Patty Flowers is AVP for Investment Property Exchange Services (IPX1031®) and a Certified Exchange Specialist®. See her website
Earlier this year many articles were written listing all of the tax changes that occurred at the beginning of 2013. That is not the purpose of this article. Instead we will review those changes that directly impact investment properties and discuss how 1031 exchanges are even more valuable to investors than they were before.
On January 1, 2013 two new tax laws which adversely affect many investors took effect: a new tax and an increase in the tax rate on capital gains. The new tax was part of The Affordable Healthcare Act. It imposes a 3.8% tax on certain investment income (including capital gains) on taxpayers whose Adjusted Gross Income exceeds $200,000 for single filers and $250,000 for married couples filing jointly. In addition, The American Taxpayer Relief Act raised the top long-term capital gain tax rate from 15% to 20% for some taxpayers. The 20% top rate applies to the extent a taxpayer’s Taxable Income exceeds $400,000 for single individuals and $450,000 for married couples filing jointly. It should be noted that these two taxes apply to different levels of income. Taxable Income is a smaller amount and results after a taxpayer’s deductions and exemptions are subtracted from the Adjusted Gross Income. Accordingly, the Healthcare tax will impact more taxpayers than if it applied to “Taxable Income”.
To illustrate the application of these taxes, let’s look at an example. Assume that Ted Taxpayer (married and filing jointly) has no other income other than the proceeds from a commercial property he plans to sell in 2013 for $3,000,000. He bought the property 10 years earlier for $1,500,000, put $200,000 of capital improvements into the building and took depreciation deductions totaling $600,000.