Long-term capital gain rates may double soon. In this episode, I'm going to
answer the question, "What is the long-term capital gains tax
rate?" And I'm going to share with you in this episode
what they are currently, what they're likely going to be in the future which
is going to shock you. I'm going to talk a little bit about the
step up and basis on long-term capital gains and how people can avoid
or postpone paying capital gain rates. And how you can differentiate between
the short-term capital gain rates, the long-term
and how it is calculated based upon how much money you earn.
So, my name is Doug Andrew. I've been a tax strategist for more than 46 years. I've
helped numerous people, thousands of clients
avoid paying unnecessary tax. And when people
ask me, "Doug, what about the long-term capital gains tax rate?" Now,
first of all, let's make sure we're clear. See, a short-term capital gain is
when you have an asset stocks or or real estate or whatever and you
own it for less than a year and you sell it for a profit,
okay? You bought it for X and you sell it for 2X or whatever.
And you did that in less than a year that's a short-term capital gain.
Now, historically, sometimes the long-term capital gain rates
applied if you if you held something for 18 months or longer.
Currently, at the recording of this episode,
it's 12 months or one year. And so, if you've held the
asset for 12 months or longer, it qualifies as a long-term
capital gain. So, what are the rates? Well, that depends upon your income
under current tax law. But I think it's about to change because as we see
the difference between the democrat philosophy
and the republican philosophy... And if you don't know what I mean,
generally speaking and this is not a political agenda that I'm on right now.
But generally speaking, the democrat philosophy
is to have more and more government programs and what have you
like medicare for all or what have you. And that costs a ton of money.
And they usually look for tax revenue by raising
taxes. Depending upon who's in power or control in congress and the executive
branch in the presidency, you'll see tax laws historically for the
last 40 50 years and you can almost predict who was in power
based upon the laws that were passed at the time. Right now, with the recording of
this episode, we have a presidential election going on
between Joe Biden for the democrat party and the
incumbent Donald Trump for the republican party.
And you'll see the difference in the capital gain tax rates based upon
who will win the election. And mark my word,
they will change depending upon who's in power.
Currently, Trump lowered taxes. And so, he believes that you need to keep money
in the economy and stimulated. That you if you need to raise tax revenue, it's
better to raise the revenue that's being generated in the country
then raising taxes. Because you when you raise the revenue that's being
taxed, you can actually lower taxes and end up with
more tax revenue. And a lot of people don't understand that.
So, I'm going to quote right now from the current tax rates for long-term capital
gains. I ought to know because I sold some
commercial a property in at the tell end of 2019.
In 2020, I sold 2 other properties. I have actually had to pay capital gain
tax rates. Now, if you are a a married couple
filing a joint tax return and you have less than 40,000 of earned income,
you don't pay any capital gain tax rates. What is a capital gain?
It is the basis what you bought the asset
for less any depreciation if it's real estate if you buy a building.
And you depreciate the building, the land is still there because the land is still
worth it. But you depreciate a building over
maybe 27 years. And as you do that, you're going to have a bigger gain
because you've been getting the tax advantages through the years
of writing that off on your tax return. Because most
rental properties, you write off at the depreciation
any interest on any indebtedness or mortgage on the property and
any maintenance and repairs. And many times that's a great tax
write-off offsetting the rental income while you own that property.
But if you buy it for half a million and you depreciate it down to a 100,000
you're going to have to pay a capital
gain on that 400,000 plus if it's now worth a million. It's
going to be huge. And so, most people try to avoid that in
a way I'm going to share with you. So, currently under the Trump tax cuts,
you do not have to pay a capital gain tax. It's
zero. If you are a single taxpayer making up to 40,000 or a married
couple filing a joint tax return would be up to $80,000.
That's for the year 2020, okay? So, you don't have to pay a capital gain
tax on any gain that you realize if your income
is low. For anything above that level, then you have to pay 15% in capital gain
tax. That's the federal rate up to just under $500,000.
I think the number is exactly $496,600. And so then
any capital gain... And that's included in your income by the way.
In other words, if you have a small income
but your capital gain is included in that, that takes you
up to a higher rate. And any capital gain or
income that you realize over about a half a million dollars
as a married couple, you're going to have to pay 20%
to the federal government in long-term capital gain tax.
Now, 41 out of 50 states has a state income
tax. And many of those states has a different tax rate maybe for capital
gains. It could be another 5% or
7% on top of that. In the state where I live, I had to pay
20% because of my income. I had to pay 20% to
the federal government plus 5% to the state. So, I paid 25%
in tax on the gain that I realized. From the basis
of the asset up to what I sold it for less any sales expenses such as realtors
fees commissions or what have you. So, your accountant will help you
calculate the exact capital gain you pay that on. You better pay it
or else they're going to come after you. Now, because of Obamacare,
there's another tax like a surtax and that I think is 3.8%
is what I had to pay when I sold my commercial buildings and also
a condo. I had to pay 20% to the federal government
plus another 3.8% for Obamacare because that's how
he partially funded the the increased cost of Obamacare. And then I had to pay
5% on top of that for the state. So, it was
up there around 28.8% is what I had to pay in
capital gain tax. Now, that's under the trump tax
cuts, you go, "Really?" Well, what do most of the democrats propose?
That the capital gained tax rate should be the same rate as
ordinary income. Trump lowered the highest tax bracket from
39.6 down to 37 percent for couples making over 400,000
or so a year. Joe Biden said, "No. I'm going to raise that back up to 39.6."
And any capital gains that are realized, he wants
people to pay tax at 39.6% not 20%. That that's double.
He needed that tax revenue to fund the 750 billion dollars that
he's going to need for his health care package. Because he
he saw that Obama got away with with throwing on a surtax.
Well he wants to come up with money by taxing people at ordinary income rates.
So, it could double. If you're thinking about selling a
property soon, you may want to get it done sooner than later before the tax
laws change as it relates to long-term capital gain
tax rates. And then the state is added on top of
that. So, how can you avoid it? Well, first of all, you need to understand
my personal feelings. I think long-term capital gain taxes are
unfair. Because when you really think about it,
if you buy an asset whether it's stocks or a piece of real estate and it
appreciates in value, generally speaking most real estate only
appreciates at the inflation rate. So, they're taxing you for inflation
for the natural increase in the cost of living.
I mean, why would they tax you for inflation?
And so, I think it's unfair. Now, maybe they should have an
exclusion or something, I don't know. Because if you did buy some stock and it
just went through the roof, maybe that's greater than inflation. But
with real estate, many times, I think it's way unfair to
tax people because of inflation. But it's here and
frankly tax revenuers love it. Those who want to come up with a
lot of tax revenue say, "Nope. We want to charge you a capital gain tax
rate based upon your ordinary income tax
bracket." And that and those same tax rates.
Do you know that many many of my clients through the years had to cough
up money when they sold their property because they had been using
the equity in their property for other things? And they were short they didn't
have it. And it's like, "Golly, this is unfair." And
so they postponed or they delayed. Now, I'm not really a big proponent of
always postponing or delaying or deferring
because there's another synonym for that. It's procrastinate.
What you're doing by putting off a capital gain
paying the tax on that is you are simply sometimes inheriting a new
headache for the old one because you have to (on real estate for example)
do a 1031 exchange. You have to buy alike property.
And so you sell one and you have a capital gain,
but if you buy a like property of equal or greater value,
you don't have to pay the capital gain. You've just moved it over to the new
property but now you got a new headache. You're still fixing toilets, evicting
tenants and taking out the trash. And maybe that's what you wanted to get away
from. And so, many people are unhappy. They feel
trapped that they're trying to avoid paying a
capital gain and they keep inheriting new headaches by continuing
to defer to when? Well under current law
as of the recording of this video, if you finally leave it behind to your children
or sometimes you can gift it to a charity,
when you die under current law, they get a step up in basis. That means,
let's say you bought a piece of real estate for $250,000
years ago. And it doubled to 500,000 and then it doubled to a million.
And I've had many clients that have done this and then they sell it. And they've
depreciated it down and they have this huge $900,000 capital
gain. Well, to avoid that, they hold on to it
until they die and they then leave it behind to their
children or to their church. And when the church inherits a million
dollar piece of real estate, they get a step up in basis.
Meaning, they don't have to pay the capital gain tax. They only have to pay
tax on what they sell it for. And if it's the children or grandchildren,
what they sell it for over and above what it was worth when they inherited
it. If it was worth a million, they only owe capital gain tax
on anything they sell it for over and above a million. That's called a step up
in basis. Well, tax revenuers, they're greedy.
Joe Biden (for example) says, "I'm going to do away with that." So, that whenever
you leave it behind to your children and grandchildren,
if you haven't noticed this they love to tax people
that can't complain because they're 6 feet under. And the children that are
getting it they're just grateful to get whatever they get. And
and it's easy because they can tax for estate taxes
and long-term capital gains. And if he does away with a step up in basis,
there is going to be a tremendous windfall of tax revenue for the
government. And many, many in the third and fourth
generations will be taxed to death as they receive money
from inheritances where they used to get a step up in basis. How sad is that?
So, that's why i'm saying maybe you might want to consider getting some of those
properties sold. Get the taxes over and done with
with the long-term capital gain rates at the lowest rate they'll probably ever be
in your lifetime. And invest the net after tax into something that's going to
be tax-free from now on. Well, what's that? I
would encourage you to watch this episode next and see where I
put my serious cash to have it accumulate tax-free.
And it actually blossoms when I pass away and transfers income
tax-free. Many, many people who decide to sell and pay the capital gain
they're flabbergasted that they're earning more
revenue than the rental income off of those properties. And they don't have to
be a landlord anymore. And at the end of the day, they leave
behind more to their family than leaving behind
the step-up and basis they were hoping to get on
their property or their stocks whatever they left behind.
So, watch this episode, learn more. I hope this answered your questions and gave
you some insights into opportunities that
maybe you didn't know existed before.