Beginning in 2013, Internal Revenue Code (IRC) Section 1031 tax deferred exchanges will defer the recently elevated federal capital gains tax for taxpayers with a modified adjusted gross income (MAGI) of $200,000 for individuals and $250,000 for married filing jointly. The aggregate tax rate will increase from 15 percent to 18.8 percent for individual and married taxpayers with a MAGI of $200,000 and $250,000 respectively. For individual and married taxpayers with a MAGI of $400,001 and $450,001, the federal capital gains rate is 23.8 percent.
capital gain tax rate
Capital Gains Tax Deferral
Deploying a capital gains tax deferral strategy merits additional attention given the pending federal changes effective January 1, 2013. Taxes on ordinary income will increase from 35 percent to 43.4 percent for earners in the highest bracket. The long-term capital gain rate will increase from 15 percent to 23.8 percent including the new 3.8 percent “health care tax” on interest, dividends and other passive income earned by individuals with income more than $200,000 per year, or $250,000 for married taxpayers. The estate and gift tax will also change. The current estate and gift tax exclusion is $5 million with any excess subject to a federal estate tax of 35 percent. Effective in 2013, the exclusion returns to $1 million with the maximum estate and gift tax increasing to 55 percent.
Deferred Gain Significance
In the normal course of business, when you sell a property that has appreciated in value, the gain is subject to federal capital gains taxes according to the Internal Revenue Code as well as subject to state capital gains taxes pursuant to individual state tax laws. The sale of an asset may also be subject to depreciation recapture tax. Both of these potential tax obligations can be deferred if the transaction qualifies for a 1031 exchange.