Capital Gains=0

Jan 19, 2008 4 Replies
D

I have been doing a number of distressed disposition analyses for taxpayers who are upside down on their mortgages. I recently met with a family who has several rental properties in this situation. I mentioned to them that this year and for the next 3 years the capital gains rate goes to zero for people in the 10 - 15% bracket, and for those above it is 5%.



They spoke with their regular accountant and their attorney. Neither of these people had heard of the change to the capital gains rate. I heard about it several years ago when it was first passed but forgot until reminded at a seminar last week.



Could somebody give me the law and year it was passed that made this change?



I am warning them that it could be changed again depending on the election results so don't count on any more lower rate after 2008.



Linda Dorfmont E.A., CFP, CSA


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J

I don't understand how the two are related. If they are upside-down on the mortgages, how do they still have a capital gain? Did they just keep pulling money out?

The new rates do not include a 5% rate as you suggest above. If your tax rate is 10 or 15%, you have a 0% cap gain rate. 25% or higher bracket still see a 15% rate.

The law was JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003 (JGTRRA) of course. A link to the details is

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Some amateurs out there will guess it was part of the Pension Protection Act of 2006, which contained a myriad of other changes to the tax code. Their accountant needs to read more.

JOE

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R

True.

Not true. It remains at 15%.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Tax Increase Pevention and Reconciliation Act of 2005.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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W

So if an elderly couple is living with income at the poverty line but has a $2M one-time capital gain on sale of their primary residence, they can take the entire $2M free of Federal capital gains? Or is there a cap on the amount that will qualify for the 0% rate?

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D

There is a cap, since the 0% rate applies only to capital gain income that would ordinarily fall within the 10% or 15% tax brackets. To see how this will work, take the "Qualified Dividends and Capital Gain Tax Worksheet" on page 35 of the 2007 1040 instructions, and substitute 0% for the 5% shown on line 11.

Complicating your example is the fact they can probably exclude $500,000 of that gain, but the remaining capital gain will also make 85% of their Social Security taxable.

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