Taxpayers pay taxes on their capital gains, which is the difference between what an investor pays to acquire an asset (often referred to as the basis) and the amount received when the investor sells the asset. An asset is anything of value that you can exchange for cash, including stocks, gold, and real estate, which are tangible assets, and intangible assets like patents and intellectual property. If the investor owns the asset for less than one year, this is considered short-term, and the gain is taxable at the same rate as ordinary income. If the investor has owned (held) the asset for one year or longer, the ownership is long-term, and the tax rate is lower.
Capital gains are reported to the IRS on Form 8949. Accordingly, the federal rates for taxing the gains in 2021 are as follows:
In addition, over certain thresholds, the gains are subject to the net investment income tax (NIIT), known as the Medicare surcharge. Finally, some states have capital gains tax levies, which can add considerably to the total. Currently, according to reports in the Wall Street Journal and elsewhere, President Biden is proposing to raise the capital gains tax rates so that the highest tier would reach 39.6%, plus the 3.8% NIIT for the highest earners. As a result, in states like California and New York, the total capital tax burden could reach 56% to 58%.
It’s not surprising that some investors prefer to reduce or defer the payment of capital gains taxes when possible. There are ways to do so while continuing to pursue valid investment goals. Among those options are buying fractional property shares through DSTs (Delaware Statutory Trusts) and investing in Qualified Opportunity Funds.
A Delaware Statutory Trust is a professionally managed, passive investment vehicle that can provide an investor with fractional ownership of a commercial property portfolio with a relatively small investment. Significantly, the DST entry and exit are eligible for a 1031 exchange, and the amount of participation is typically customizable. DSTs may also offer tax-advantaged income to the shareholders, in addition to freedom from ongoing landlord burdens.
DST participation has risks and benefits, and investors should consult a qualified financial advisor.
Qualified Opportunity Funds are investment opportunities resulting from the 2017 Tax Cuts and Jobs Act. The legislation created "opportunity zones," which are designated as economically challenged areas throughout the country. Approximately 9000 such zones are available for investment projects subject to specific stipulations but with the incentive that investors can reduce and defer capital gains taxes if they meet the program requirements. Potential deferral and reduction benefits are:
Qualified Opportunity Funds have risks like all investments, and investors should seek professional advice when considering options.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. No public market currently exists, and one may never exist, for the interests of any DST program.