Capital Gains Tax - Need to Understand

Ryman,

The fact that you "only cleared $130k per family" is not merely a function of the capital gain structure, (in fact I would argue it isn't a factor at all) but rather you return was a function of the market! Perhaps the rental market in your area is not conducive to big profits. Perhaps you bought or sold at e wrong time. Perhaps the local rental economy got softer over time such that it was harder to keep rental rates up.
As for what each family "cleared" a good accountant might look at e numbers a bit differently. For example, what was the cash flow rate of return (positive or negative) on a per year basis? What was the after tax return, taking into account the value of tax savings from depreciation, interest and expense deductions etc.

For example, we sold a rental house last year for $10k more than we paid for it. In reality our net was much higher, as we had positive cash flow annually, depreciation (which was recaptured at sale) interest and opperating cost deductions etc.

So to blame you lack of gain on the tax structure is naive at best.

Icarus

 

Encouraging long term investment is suppose to help keep the markets stable. In theory, without it more people would sell at shorter intervals.

As pointed out, incentives to encourage long term investment isn't the problem, it's that the tax rate is lower than most other income.

 

To those who say that taxing capital gains is double taxation (taxing money that's already been taxed) I point out the obvious: You're not being taxed a second time on the same money. You're being taxed on profit that you made on your investment. You're not paying tax on the basis amount.

The justification for not taxing long-term capital gains is that you want to encourage investment. But we also want to encourage labor, and we tax wages earned by labor. And although I hold the view that short-term speculation is a bad thing, since it extracts value from the economy, its proponents (principally brokers who make commissions on it) argue that it helps the markets by providing liquidity.

We want liquidity in the market. We want people to do useful labor. We want long-term investment. We tax two of these at the higher rate, but we tax one at the lower rate, and this seems irrational to me. A person who earns his bread by the sweat of his brow should not have to pay a higher tax rate than a person who gains his money merely by buying something, waiting for its price to go up, and then selling it.

JMO.

 

...according to Wikipedia:

In other words, new technology like HEV's and EV's benefits from cap gain tax preferences. On the other hand the more controversial Bush era tax cuts semed to be directed more to reduce tax burden on the wealthy and now also to propping up the stock market (according to Fidelity most 401K's have now recovered from the 2008 market sell off).

But what I think we need right now are some saving vehicles for lower income brackets. If you are old enough you remember All Savers certificates when the banks were temporarily allowed to sell tax free CD's to the public paying a good rate. IBonds are pretty good maybe they could add some temporary incentives to those.

 

Taxes are not just a means of generating revenue. They're a means of effecting social change, which in part is what governments should be doing. When deductions and favourable tax rates are given for certain things, those activities are encouraged. Where that ideal gets perverted is when special interest groups lobby for preferential treatment. Then, taxation becomes less of a means to improve society, and more a method of enriching certain members. Sadly, the Golden Rule has been twisted into the axiom 'Those with the gold make the rules.'

Taxing capital gains at a lesser rate encourages investment in corporations, increases their monetary value, and enriches those who own and run them.

 

In the 1960s and up to 1980 or so, ordinary income tax rates on earned income were graduated, but went as high as 70% on income at the highest levels. During that time, long term capital gains taxes were 40% of ordinary income tax rates, so LTCG tax rates only went as high as 28%. That tax structure stayed in place a long time, through 1980. Beginning in 1981, a series of tax acts reduced the earned income tax rates and raised Social Security tax base and medicaid tax base but left the 28% LT Capital Gains rate alone.

During the G. W. Bush era, he and the Republican Congress reduced LT Capital Gains rates to 15%. At the same time they eliminated many banking regulations and restrictions (so that banks could "compete in financial markets"). Do you remember the pictures of Republican senators with machetes and such "cutting the red tape" from stacks of government regulations?

With lower tax rates and easy money available, the real estate market went crazy. A lot land developers, home builders and commercial construction guys got in the market and made tons of money but paid very little in taxes. Banks, which were now deregulated, were free to engage in riskier loans and gamble with depositors' money. Real estate speculation went through the roof.

Eventually, a lot of ordinary people tried to get on the gravey train by buying spec homes with cheap and easy credit. But they were late to the party and lost their shirts; the house of cards was already crumbling. Economic reality set in. Who were their buyers going to be? With too much leverage (debt) and no exit strategy, they were doomed.

Now that the party is over, I don't know why they haven't raised LT capital gains rates back to pre-Bush 28% levels. That's still pretty low rate - sufficient to encourage people with investment capital to take a risk on a new business venture or new technology. But what politition would want to be the guy who raised tax rates?

 

One of the problems of using the tax code to foster policy goals is that it makes it virtually impossible to do a cost/benefit analysis. How much bang for the buck do you get when you give a tax credit or deduction or exemption for an activity you want to promote? It's pretty much impossible to know.

OTOH, if you give a direct subsidy for activities you want to promote it makes it easier to know what benefits you're getting for the dollars spent, and might make it a little harder for politicians to pay off contributors. And it makes it easier to target those who really need the boost, instead of giving benefits to an entire industry which might not really provide any additional benefit to society.

 

...probably due to the stock market losses in 2008, the Fed and Congress have been trying to prop up the stock market to rescue 401K's and encourage people to invest in stocks. Basically the Bush tax cuts morphed into part of the economic recovery plan. I don't know how we get back to normal except to phase out gradually.

 

I'm not being naive at all, I'm simply stating that its BS that the Federal Government takes what they do! They act like it's their money and they'll give you what they feel you should keep and they will distribute rest as they see fit.
We recieved all the same positives and negatives you mention, I am or we are not naive or stupid as you infer and we are believers in the free market. I'm saying we would have cleared a lot more if it weren't for the greed of the Feds. If you really enjoy giving away your money, you can send me some.

 

If you think owning and managing that property which included diggin in mud to repair septic lines or broken water lines and on and on, for 20 years was merely "buying something and waiting for its price to go up", you need to lay off the glaucoma meds. BTW we bought the property and built the units.

 

I am not meaning to imply you were (or are) stupid, merely possibly niave, or a victim of bad luck, or you simply made mistakes along the way if you didn't make the kind of money you feel you should have made for your hard work.

For example, for the same investment in time and money could have done better in a different project, or even in a different investment like the stock market?

For another example, you mention that you had to spend time digging in the mud repairing broken water lines and septic systems. I for one, will not own a rental property that is not serviced by public sewer for that very reason. I learned very early on tht you never can over estimate what people will toss down the drain. At least in the case of a public sewer I can limit my risk substantially.

I would only add, yet once again, taxes are the price we pay for a civil society. We can argue that certain spending priorities are not right, but we all use government services, from public schools to public roads. To complain about taxes without proposing a reasoned alternative as to how to pay for the services we use is flawed. As a start, let's talk about how much we spend in this country for " defense" ( and how secure we feel as a result) compared to what most people think we spend on welfare. Hint,, a lot vs not a lot in relative terms!

Icarus

 

I wouldn't totally disagree with that. I wasn't necessarily suggesting that the current methods are how things should be done.

Think of legislation as the stick, and favourable taxation as the carrot. Both can be effective in various situations. Giving people a deduction for charitable donations, as an example, is probably more effective than legislating which charities are funded, and less expensive than government doing the work instead.

Also, people are generally more inclined to go after 'the carrot' than they are motivated by 'the stick'. Legislation is one thing, and enforcement is quite another.

And yes, tax law is an ugly mess. We're long past the days when all of government moves in one direction for the benefit of all. There are so many undue influences and competing interests that it's a wonder anything gets accomplished. George Carlin's sarcastic comment that 'government is the entertainment arm of the military-industrial complex' may not be so far off.

 

Well I am not a big-time stock trader. When I do invest in 401K etc I like to buy and hold forever, so I like stability and some credit for long term investing is good. That's the personal effect on me and I want slow and steady ship. Currently with the on-again off-again Bush tax credits it is very difficult to plan for the future. Unacceptable really for Congress to leave us hanging like this with last minute decisions all the time.

 

You did work and reaped a profit. And yet you paid LESS tax than someone who works just as hard but receives a salary.

Depending on when you sold (before or after the crash) some of the money you made was due to your labor and some was due to the rise in the property value. You earned and you deserved what you made by improving the property. But the rise in land values was not because of anything you did or any work you performed.

Your profit came from two sources: your work, and the vagaries of the market.

But you were NOT taxed on your basis. You were NOT taxed a second time on the money you invested. You were only taxed on the difference between what you paid and what you sold for.

And you were taxed at a lower rate than people who work for wages.

I benefit from capital gains taxes. Some of my income is capital gains and I pay lower taxes on that portion of my income than on interest or dividends, or than I did on wage income before I retired. Why should I pay less tax on the money one of my mutual funds classifies as "capital gains"?

It's even worse: I made a bad investment back around '06, a mutual fund that went WAY down, and I got out of it, resulting in a capital loss. So the tax law allowed me to use that to offset an equal amount of capital gains. For every dollar I lost in that bad investment, the IRS forgave me from paying any tax on a dollar of capital gains in future years. But if a wage-earner had invested in the same fund and lost money, he would not be allowed to deduct that loss from his wages before tax. It is a pure give-away to the rich to allow capital losses to offset capital gains.

I'll take anything the government wants to give me, because the amount I pay is a drop in the ocean. But a fair and common-sense tax system would tax capital gains the same as wages.

The money you made on your property investment should be taxed at the same rate as money earned in wages, no more and no less. You were not taxed on your investment, only on your profit, and that's as it should be. But you were taxed less than people who work for wages, and that's just plain unfair.