Spring 2009 issue of Horizons

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

sale transaction. For those who do not participate in a “1031 exchange” to defer the tax consequences of a sale transaction, the capital gains tax has a significant impact. Under a new administration in 2009, there is a chance the 1031 exchange benefits may be reduced or eliminated altogether, forcing sellers to pay some or all of the capital gains tax. Table 1 gives an example of how the long-term capital gains tax is computed (for qualified real estate assets held for more than one year). A sometimes overlooked component of the overall tax effect of a commercial property sale is the “Depreciation Recapture” shown in Table 1 at 25 percent (of the accumulated depreciation). After reducing the “Net Gain on Sale” by the accumulated depreciation amount, the capital gains tax rate is then applied to the remaining balance. The current highest and most commonly applied long-term capital gains tax rate for commercial property is 15 percent. While we may not see a change in the depreciation recapture tax rate anytime soon, there are numerous discussions about increasing the capital gains tax rate. It may be increased to 25-28 percent because the Federal Government can increase tax revenues without disturbing the ordinary income taxation rates of Americans. In our example, raising the rate to 28 percent would increase the total tax liability to $107,500, an increase of 43 percent.

It is important to understand the historical fluctuations in the long-term capital gains tax rate. The graph shows the tax rates going back to 1916. The last increase to 28 percent came in 1987, when the rate was adjusted from 20 percent in 1982-1986. The 28 percent rate was in effect for approximately 10 years. In 1997, the rate was reduced to 20 percent and was in effect until 2003, when it was further reduced to the current level of 15 percent. The 15 percent tax rate was scheduled to expire in 2008 but was extended to the end of 2010. Current laws call for an end to the 15 percent long-term capital gains tax rate and a reversion to the 20 percent rate on December 31, 2010. Conclusion Every real estate investor is different. Some are buyers and some are sellers. Many have a specialty or focus on industrial, office, retail or multi-family. Investment prices range from $500,000 to $50 million, but the common thread among all investors is the desire to maximize the value of commercial real estate assets. We presented three important topics that affect this “value.” The reader must apply this information to his/her particular set of circumstances and determine how asset values may be affected. We empower you to make better decisions regarding commercial real estate to achieve your short and long-term goals. Lastly, don’t rush out and make decisions you will regret in the future. Look at all aspects of your current situation and what you want to accomplish. Analyze the numbers and then step back and listen to what your gut tells you. There is more to successful real estate investment decisions than cap rates and tax rates. Applying your wide range of experience to our new and ever-changing environment will lead you in the right direction.

Range of Capital Gains Tax Rates by Decade

Range of Capital Gains Tax Rates by Decade

1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Questions? Contact:

Bryan Keller, CPA Partner-in-Charge Real Estate Services Group 314.290.3341 bryan.keller@rubinbrown.com

0%

20%

40%

60%

80%

Source: Citizens for Tax Justice, Grubb & Ellis

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u spring 2009 issue