Investors Take Advantage of Low Capital Gains Tax Rates
Kurt Brouwer October 22nd, 2007
Whether we are talking about stocks, real estate or a business, one of the enduring themes of long-term investing is to defer taxes as long as possible. Two related factors are causing investors to rethink this tried and true strategy. First, capital gains tax rates are at a historically low point. Second, tax rates may be going up in the next few years. As this article points out, investors are starting to change their behavior [emphasis added]:
Looming Tax-Rate Change Spurs Sales (The Wall Street Journal, October 18, 2020, Arden Dale)
‘Investors may be starting to sell stock at today’s low capital-gains tax rate because they expect it to rise in a year or two.
The standard top tax rate on long-term gains is 15%, but it’s set to rise to 20% in 2011. Many financial advisers believe a Democratic administration in 2009 may raise it even higher — and sooner — and some are urging clients to consider selling off big stock positions now to capture the current rate. Long-term gains are those on investments held for more than a year.
“You should never let the tax tail wag the dog,” says Edmund T. Hyland, global investment specialist at JPMorgan Private Bank, a unit of J.P. Morgan Chase & Co. “But we think there is a window of opportunity with the rate at 15% to maybe be quicker to diversify than you might otherwise have been. We’re encouraging clients who have concentrated positions of low-basis stock to think about this.”…’
This article focuses on sales of stock, but the same issue applies to any appreciated asset such as real estate. Many investors seeking to defer taxes on real estate do a 1031 Exchange which allows them to exchange one property for another without realizing a gain. However, those considering such a move may want to rethink it because higher capital gains tax rates in the future could reduce or even eliminate the benefit of tax deferral. The article continues:
‘…Many tax experts are laying odds that a new administration will move quickly to raise the top rate even higher than 20%, according to David Shechtman, chair of the tax section at Drinker Biddle & Reath LLP in Philadelphia.
The idea of Congress cutting rates seems far-fetched. “Never say never, but it’s hard to imagine that the standard cap-gains rate is ever going to go below 15%,” says JPMorgan’s Mr. Hyland…
‘...Prior tax increases have led to a surge in capital gains being realized ahead of time. After Congress passed the Tax Reform Act of 1986 and the top rate on gains rose to 28%, there was a “surge of recognition of capital gains” in the last months of the year, says Len Burman, director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “People sold a lot of assets to avoid the increase.”…’
At this point, there is no certainty that tax rates are going up, but I think it is reasonable to conclude that tax rates are not likely to go lower. While I see no reason to sell an asset just to take advantage of low tax rates, I also think delaying a sale just to defer gains is less attractive now because of possibility that capital gains rate will climb in the next few years.