Deferring Capital Gains Taxes with NAFEP's Self Directed Installment Sale (SDIS^SM)

The Capital Gains Tax Problem:
Capital gains taxes are a tax on the profit we make when we sell assets. The asset may be real estate, personal property, investments and securities, a business, an art collection, etc. Any long term asset sold at a profit is subject to a capital gains tax of some rate. Figure 1 illustrates this concept. The left side represents the price paid or the cost of the asset. This cost is called the "Basis". Moving to the right side of the graph is a progression thru time. Over time the asset grows in value or appreciates. The right side of the graph represents the point of time at which the owner wants to sell the asset. Unfortunately the seller does not get to keep all the profit, the capital gains, and is taxed at some rate.

The rate for a significantly sized sale of an asset owned for one year or longer (referred to as long term gains) will be 15% for federal taxes. Most states charge 5% to 10% on top of that, making the total tax run as high as 25%. If there is depreciation recapture in the asset sale, that is taxed at 25% federal rate, making the tax on recapture higher than the capital gains tax.

That isn't the end of the story for the total tax effect though. Capital gains must be added to the taxpayer's adjusted gross income (AGI). This means that capital gains or profits will raise the "floor" above which one can take a number of itemized deductions. This often results in a large decrease or total loss of those deductions. Also the higher AGI from adding in the capital gains is taken into account in computing the phase out of personal exemptions. Again, for many taxpayers this results in a large loss of deductions. This makes the effective, but hidden, capital gains rate much larger than the stated federal and state rates. As a result of the hidden and the recapture taxes the total tax effect on a capital gains sale can easily exceed 25%. To make matters worse the capital gains and depreciation recapture taxes must be paid within ninety days of the sale of the asset.

Click Here To learn more about deferring capital gains with a Self Directed Installment Sale (SDIS^SM).

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