Do you own an asset that has appreciated over the years? Are you considering selling that asset, but are worried about the income tax consequences? This isn’t necessarily a bad problem to have and it is possible to pay very little, if any, income tax when selling an appreciated asset. However, income tax planning may be required to take advantage of preferable long term capital gains tax rates.
Examples of assets that may qualify for capital gain treatment include public or private company stock, land, and apartment buildings just to name a few. To qualify for long term capital gains treatment, you must have owned the asset for more than 1 year prior to the sale.
Long term capital gains are taxed at either 0%, 15% or 20%. In addition, a 3.8 surtax may apply to high income individuals, and higher rates apply if there is depreciation recapture. The rate applicable to you is dependent on your overall taxable income. For those with 2016 income under $37,650 ($75,300 for Married Filling Joint) the long term capital gains rate was 0%. If 2016 taxable income was between $37,650 and $415,050 ($75,300 and $466,950 MFJ) the long term capital gains rate was 15%. If taxable income was above $415,050 ($466,950 MFJ) the long term capital gains rate was 20%.
For example, if a married couple’s taxable income was $80,000 and $20,000 of the $80,000 was long term capital gains, they would pay 0% on the first $15,300 of gain and pay 15% on the last $4,700 of gain that exceeds $75,300 of total taxable income.
Now that we know what the 0% long term capital gains tax rate is, how can you take advantage?
There are several tools in our bag and each situation is different. Land and real estate could be sold on a contract for deed. Using a contract for deed and electing the installment method would spread the capital gains out over several years and, if done correctly, you may be able to take advantage of the 0% long term capital gains tax rate each year of the contract.
In the case of stock, we could assist you with planning in December to determine the exact amount of 0% long term capital gains bracket you have remaining and help you trigger the right amount of gains in 2017.. If you still wanted to hold the stock you can repurchase the stock immediately after it was sold, but with an increased income tax basis.
Another great option is to defer other types of income, for example with deductible retirement contributions, to both reduce ordinary income tax and reduce the long term capital gains tax rate from 15% to 0%.
Appreciated assets could also play a big role in charitable giving and estate planning. There are several other factors that need to be considered including taxable social security income and surtaxes. If you want to take advantage of the 0% long term capital gains tax rate please contact your KTLLP tax advisor.