Word: taxingly
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Dates: during 1990-1999
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Another capital-gains trick has to do with the prior sale of assets when the buyer is still paying in installments. The new law allows you to apply the new capital-gains tax rate to any payments received on or after May 7, 1997, even if the sale occurred years ago. More interesting is a quirky provision that has to do with depreciated assets. Say you bought a rental property for $100,000 and over several years depreciated it down to $80,000, and then sold it for $110,000. Under the old law, you must...
...taxes the recovered depreciation, in this case $20,000, at a rate of 25%. The rest of the gain is taxed at 20%. Where this really gets tricky is with installment sales. Tom Ochsenschlager, a tax partner with Grant Thornton in Washington, says taxpayers may choose one of two ways to apply the new rule. They may pay 25% on all gains received until the depreciation has been recovered, and then pay 20% on everything after that. Or they may pay a blended rate on all gains for as long as they receive payments...
Beware: this is a lifetime choice. The route you choose the first time will be with you on all gains from installment sales going forward. Ochsenschlager says the blended rate makes the most sense because it results in a lower immediate tax liability. Why pay 25% when you can get a blended rate somewhere between 25% and 20%? But let's say you sold that rental property years ago and by now have recovered the full $20,000 of depreciation. You no longer have any gains due to you that will be taxable at 25%. If you decline the blended...
Moving away from capital gains, the big new item is the way you get treated when you sell a house. Under the old rules, you paid no tax on a gain from the sale of your residence so long as you rolled the entire gain into another, more expensive house. You got a one-time exclusion of $125,000 if you were 55 or older. That exclusion typically was used late in life by empty-nesters...
...more. "We have a number of people in that category," Mellon's Doyle points out. If they sold or went to contract on a new house before Aug. 5, they can still roll that $1 million-plus gain into a new residence and avoid a hefty capital-gains tax. But if their gain is under $500,000, they should take the new exclusion and not pile up a big gain in their new home...