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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

20%/33%/45%/59% - How Much Will Your Capital Gains Rate Go Up By?!

Nov 12, 2012

Assuming that the Bush Tax Cuts are not extended, we know that capital gains tax rates will increase in 2013.  The key question, is by how much.  Here is a brief recap of the increases:

  • 20% - If you acquire property after December 31, 2000 and hold it for at least five years, your maximum capital gains tax rate will be 18% of a 20% increase from 2012 rates. 
  • 33.333% - If you hold property for more than one year and sell it in 2013, your normal maximum capital gains tax rate will be 20% or a 33.333% increase.
  • 45.333% - If you are subject to the new Medicare Surtax on investment income (as discussed in many previous posts) and you acquired the asset after December 31, 2000 and hold it for at least five years, your new rate will be 21.8% (18% plus 3.8% Medicare Surtax) or 45.333% higher than your current rate.
  • 58.667% - If you are subject to the new Medicare Surtax on investment income and hold the asset for more than one year (do not meet the five year rules), then your new rate will be 23.8% or a 58.667% increase.

 

As you can see, at a minimum your capital gains rate is going up 20% and could be as high as a 59% increase.  Also, factoring in possible state income tax increases (California is increasing their top rate by 3% or almost 30%), you could be looking at a 75% increase over your current rate.

How can you prevent this?

  • Consider using a Section 1031 tax-deferred exchange.  If you sell farmland at a large gain, you can roll it over into other real estate and defer the tax.
  • Consider using an installment sale to keep you out of the Medicare Surtax.
  • Consider using a Charitable Remainder Trust (CRT) - See my latest monthly column in Top Producer on how these can work for you.
  • Consider gifting the asset to your kids first and spread out the gain to keep it under the Medicare Surtax threshold.

 

There is a chance that the Bush Tax Cuts may be extended, however, we may not know that until late December or even into 2013.  If you are facing a large capital gains tax increase for 2013, you have less than two months to plan for it.  Get started now.

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