Capital Gains - Newbie Question
Forming an LLC to purchase and rent our properties. Planning to hold for at least 3-5 years, possibly 10 in some instances.
What is the capital gains tax rate I should figure when building my cashflow model? I think anything held over 1 year is considered Long Term and thus will be taxed at 15% when I sell. Is this correct? I want my model to be as assurate as possible. Thanks for your input.
For holding periods one year or less, the capital gains tax rate is the same as your ordinary income tax rate.
For holding periods greater than one year, the long term capital gains tax rate is indexed to your tax bracket.For the 15% tax bracket and lower, the long term capital gains tax rate is5% until 31 Dec 2007.0% (zero) for 2008 only, then,10% beginning 1 Jan 2009.
For the 25% tax bracket and higher, the long term capital gains tax rate is15% through 31 Dec 2008, then,20% beginning 1 Jan 2009.
Regardless of your tax bracket, depreciation is recaptured at 25%.If you are in the 15% tax bracket and your capital gains puts you into the next higher tax bracket, then the amount that keeps you in the 15% bracket is taxed according to the 15% bracket rules and the amount that falls into the 25% bracket is taxed at the 25% bracket rules.
As a general rule, the LLC does not pay taxes in its own right. Instead, all the income earned by the LLC is passed through to the members.
The members of the LLC each report their share of the LLC income on their own personal income tax returns and compute the taxes due on their respective share of income and/or capital gains as if the LLC did not exist.
Does this clear it up for you.
You should also look into the future. What is your exit strategy? Are you going to sell and pay taxes for sure as your exit strategy, or is there a possibility that you would exchange into other property? If you might exchange, are the three investors going to stay together or would they possibly go their separate ways? These are important issues to consider when setting up the three member LLC. If there is a chance that one or more of the investors may want to exchange (or do their own thing), the three member LLC creates problems from a 1301 exchange perspective. Are you setting up the LLC strictly for liability protection? If so, you might want to consider three single member LLCs (which are each considered to be disregarded entities) so that each investors has complete flexibility to do what ever they want at the back end. Just food for thought.
[addsig]
My suggestion: Use your Roth IRA to acquire properties in trust and avoid income tax on all the gain...forever.