Nothing Can Be Said To Be Certain, Except Death And Capital Gains Taxes.

By: Matt Jones, Broker

A couple weeks ago my colleague, John Meyer, wrote a blog about why selling is becoming increasingly tempting for long-term owners (click to read here if you missed it). This prompted an invitation from the Lakeview Developers Association asking for John and I to come expand on the idea. We spoke to a group of about 30 long-term owners in what ended up being a very lively forum. The biggest take away for me? Some of these owners would sell, if they didn't have to pay such a high capital gains tax.

Upon the sale of a building where a capital gain is realized, you have two options:

1) You can do a 1031 exchange and defer the capital gains tax to a later date.
2) You can pay the capital gains tax.

This was written primarily for the people that choose, or have to choose, #2.

We’ve all heard Benjamin Franklin’s quote, “In this world nothing can be said to be certain, except death and taxes.” There will always be capital gains taxes; we don’t have much control over those. Once we come to grips with the fact that the capital gains tax is a constant and isn’t going anywhere, we can take a step back to look at the actual capital gains tax rate as something that is not constant and another variable to be analyzed. It is a fluctuating number, much like real estate values or interest rates. We cannot control what the rate is, but we can control how we time markets. If you look at a snapshot of the capital gains rate over the last 100 years and view it like you would a real estate cycle, you’ll see that the current rate is actually below the 100 year average. Simply put, if you have to pay a capital gains tax upon the sale of your building, now is actually a pretty good time to do so, historically speaking. Especially when you also consider the value of your asset over that same 100 year period. No one likes paying taxes, but if you are in a position where you have to pay a capital gains tax, wouldn’t you want to pay it when your property was at its peak value and the capital gains tax is at a lower than average rate?

*Assumes 10-year holding period, 30% of gain recognized (sliding scale for exclusion based on holding period).

DISCLAIMER: Matt Jones and/or Kiser Group are not tax professionals and the above is merely intended as commentary on market timing as it relates to capital gains taxes. You should contact your tax professional to discuss and calculate your own tax responsibilities, as every individual is different.

1.) Historical information from: https://www.cchgroup.com/news-and-insights/wbot2015/historical-capital-gain