5% Or 15% Cap Gains Rate?
Hello All,
This question refers to selling residential rental property held for 4 years (so far).
I've read some of the post and am confused on one issue, how do I know if I fall into the 5% or 15% catagory? Is it because of my w-2 earnings gross? My Adjusted gross income? Could the capital gain itself cause me to fall into another catagory?
Also I read something (IRS) about holding the property for 5 years to qualify? Does that apply here. We have not decided to sell yet, but it would be nice to know the tax consequences if we do.
Thanks
Matt_PA
The capital gain tax rate is based on your marginal tax bracket. Get out your 2002 tax return.
If you are married, filing a joint tax return, look at the amount on line 41. If the amount on line 41 is between $12000 and $46700, you are in the 15% tax bracket. Your capital gains tax rate will be 5% until December 31, 2007. On January 1, 2008 through December 31, 2008, your capital gains tax rate will be ZERO. On January 1, 2009, your capital gains tax rate will be 10%. In future years, these tax bracket threshholds will be indexed for inflation.
If the amount on line 41 is between $46700 and $112850, you are in the 25% tax bracket. Your capital gains tax rate will be 15% until December 31, 2008. After that, your capital gains tax rate will be 20%.
These rates apply to sales after May 6, 2003 -- no five year rule applies here.
[ Edited by DaveT on Date 07/27/2003 ]
Do not forget that any capital gain is first used to compute depreciation recapture first at the 25% rate and then allocated to the 5% or 15% rates.
[addsig]
Dave and wexter,
Thank you very much. Dave does my 2002 return determine my rate for 2003?
Line 41 on 2002 is low enough for 5% for 2003. If the gain was large enough could the gain itself push me to the next bracket the same year?
Thanks again.
The dollar amounts for the tax brackets are unchanged for this year.
I wouldn't think that your taxable capital gain would change your marginal tax bracket, but it should make a good experiment.
Last year, for the 15% tax bracket, the capital gains tax rate was 10%; and 20% for the 27% tax bracket. Try recomputing your tax return for last year by adding a taxable capital gain large enough to put you into the next tax bracket -- then see what happens.
Why pay any? Re invest your gain into real estate and defer it...
[addsig]
Sometimes a tax-deferred exchange is more costly to the investor than the actual taxes that would have been due.
It helps to know how much the tax bite would be before launching a tax deferral strategy.
Hello,
Thanks for all the advice.
P.S. I would rather pay the 5% Than have restrictions put on my money with a 1031.
you loose to much control with a 1031 exchange and also the next tax code may have a high capital gains tax. I'd rather pay now than be at the governments mercy.
Thanks
Matt
How about exchanging your rental property for a house you would live in? Rent it for a "Reasonable time" and then convert it to your residence, live in it for 2 yrs and sell, taking advantage of the $500K (assuming you are married) capital gain gift from the government.
Net result= No tax on gain less than $500K