With a $16 trillion+ deficit and $1.5 trillion recently added each year, cutting costs and increasing revenue has become a paramount of importance. One possible avenue for generating revenue  is likely to be increasing tax dues from the sale of investments such as real estate.

Presently, if property is being used as an investment, appreciates in value, and is subsequently sold at a higher price, the capital gains tax rate stands at 15%.  This, however, has not always been the case.  Twenty-five years ago, the profit on the sale of investment real estate was taxed at the ordinary income tax rate, which is up to 35%.

Worst yet, there’s also talk about increasing the ordinary income tax rate from a maximum of 35% presently, to an even higher rate of 40% to even 45%.  If both of these revenue generating ideas were implemented by changing the tax laws, it would have a significant impact on the amount the seller of investment real estate would have to pay the government.  The additional tax liability could be significantly more than what a seller may get by waiting for the property to appreciate in value.  Consider the following example:

	Present Capital Gains Tax – 15%	Present Ordinary Income Tax Rate Maximum – 35%	Possible Future Capital Gains Rate – 45%
$100,000	$15,000	$35,000	$45,000
$200,000	$30,000	$70,000	$90,000
$300,000	$45,000	$105,000	$135,000
$400,000	$60,000	$140,000	$180,000
$500,000	$75,000	$175,000	$225,000
$600,000	$90,000	$210,000	$270,000
$700,000	$105,000	$245,000	$315,000
$800,000	$120,000	$280,000	$360,000
$900,000	$135,000	$315,000	$405,000
$1,000,000	$150,000	$350,000	$450,000

 

In the above example, someone selling a house for $100,000 only pays the government $15,000.  If the government reverts back to an ordinary income tax rate of 35%, the liability would be $35,000, shown in the example above.  The worst possible scenario, if capital gains rates are taxed at ordinary tax rates, and ordinary tax rates are increased to 45%, the liability would be $45,000.  This would be an additional $30,000, or 30% more, than the present rate if proposed changes are enacted.

Given this scenario, it may be advisable for investors that own investment real estate with significant appreciation, to consider selling now!