What Happens If and When the Bush Taxs Cuts Expire

If the Bush tax cuts are allowed to expire this year (and current indications are they should), the capital gains tax rate will go from the current 15 percent to 20 percent next year.

Who is happy about paying a third more taxes next year on the sale of their investment real estate?

Answer: Nobody.

But what can you do about it?

Answer: Make a plan based on your situation.
2010 sales

If you were planning to sell in the next year, you can keep more of your sale proceeds (after tax) if you can close before Jan. 1, 2011.

2011 sales

If you can't or won't sell before the end of this year, then you have two choices with dramatically different tax consequences on investment real estate sales that close in 2011. You can either:

A. Brace yourself to pay a higher capital gains tax to receive the cash equity from your sale proceeds, or

B. Pay little to no capital gains tax by using a 1031 Exchange when you sell. But this means you can't touch your cash equity at the closing (or if you do ... only a small portion). It also means keeping your equity invested in the deal and staying within your current ownership entity ... invested in another piece of real estate. Some long-standing partners in ownership entities today may prefer to go their own way with their respective equity shares upon a sale. But you can't do that with a 1031 Exchange if you want to legally avoid paying the capital gains tax on the sale. You need to stay together in the same entity to take advantage of these tax benefits available to you per U.S. Tax Code 1031. Since the capital gains tax rate is going up, we can expect to see more 1031 exchange transactions being utilized to minimize tax liabilities in 2011.

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