Ok here's the deal, I sold an investment property last year. I had owned it for about 1.5 - 2 years. Everything I read online said that long term capital gains are taxed at 15%. When I went to my accountant (who is actually a very reputable account in my workplace) they told me that the amount of taxes i pay on that gain depends on my tax bracket and that the gain would be added in to my income for the year. So... I assume that I paid a significant amount more since im in 28% bracket. Now I sold another investment property this year, same deal, held for over a year. When I go back to the accountant, do I thank them for doing every right last year, or toss them my 2005 return and tell them to get busy re-doing it? ;) Thanks, Dan
Long term capital gains are taxed at 15% maximum. It's possible that you misinterpreted what the guy told you earlier. The only reason these gains would be taxed at regular rates is if this is your business, the business of buying and selling real estate.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
Without actually seeing your 2005 return it's impossible to say whether or not it was done correctly. I'm betting however that it was. As for the tax rate, 15% is not necessarily the capital gains rate; it could be as low as 5%, depending on your income. But the tip off is this: the gain was reported on schedule D, and on a worksheet somewhere is the proper calculation. Check your file copy given you by the preparer. He DID give you a copy, right? ChEAr$, Harlan Lunsford, EA n LA
Long-term capital gains on most types of property are taxed at a rate of either 5% or 15%, depending on your tax bracket.
First of all, even the tax rate on long-term capital gains depends on your tax bracket. If you are in a low enough bracket, some or all of the gain will be taxed at a rate of
5%. So it is true that the amount of tax depends on your bracket. That doesn't mean it's not being treated as long-term capital gain, or that it's being taxed at the same rate as other income. Furthermore, it is possible that not all of the gain on the property is long-term capital gain. You didn't say what the property was, but I am assuming it was land, possibly with a building on it. If you took, or could have taken, depreciation on the building or on some other part of the property, then some of the gain would be taxed as ordinary income.
"Added to your income" and "taxed as ordinary income" are not the same thing. All of your income, of any type, is added together to determine your total income and your Adjusted Gross Income (AGI). This does not mean that all of that income is taxed at the same rates. Different rates are applied to different types of income, even though all the income is included in the total.
You may have, in effect, paid somewhat more than 15%, even on the part of the gain that is treated as long-term capital gain, but not because it was taxed at 28%. The direct tax on the long-term capital gain is calculated at the 15% rate. But the gain does increase your AGI, and the higher AGI could reduce or eliminate various deductions and credits that are affected by AGI. Because of the side effects of the higher AGI, it is quite possible that the gain caused your total tax to increase by more than 15% of the long-term gain, even though the 15% rate was applied to the gain itself. You could say that the effective rate on the long-term capital gain is somewhat higher than the nominal rate of 15%.
You could ask him or her to go over your 2005 return with you and explain how the income from the sale was reported and how the tax was calculated. It would be better to do that now, rather than at the height of the tax season.
Thanks for the advice guys, a lot of great info here. I'm going to review my 2005 return and see how it was done. You're probably correct in that it was most likely done right but I misunderstood. Dan
Other things that could incrase your effective tax rate are social security income, which might move from nontaxable to
85% of social security becoming taxable, and adding to AGI (See above.) And though L-T Capital Gains are taxed at 15% for AMT, a large L-T Gain can generate AMT thereby adding to your tax bill. __ Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
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