It is very possible that we will have a Democratic President next year, and with them an increased capital gains tax rate. From the sound of things, Barack Obama or Hillary Clinton were plan to let the Bush tax cuts expire, which includes the lower (15 percent) capital gains rate.
Clinton would probably just let them expire, and we would return to the pre-Bush 20 percent rate), but Obama plans to raise it above the pre-Bush rate, and could attempt to change the legislation prior to the Bush tax cuts’ expiration at the end of 2010.
The Wall Street Journal pointed out that this uncertainty should compel investors to make necessary arrangements now to maximize their returns. If an investor knows that he or she is going to need the money sometime in 2009, for example, it might make sense to look at selling the property this year to avoid the potentially higher capital gains rates. Considering the struggling real estate market, I wouldn’t suggest this strategy unless you need the money out of the property..
If you don’t need the money and if you later decide that you want a different property, then you can 1031 exchange into a different investment property, and defer those taxes. The beauty of the 1031 is that you can keep deferring those taxes until you die, and when that happens: A) You won’t care about taxes anymore, and B) Your heirs will take possession a the new higher base value, so they don’t have to pay the taxes either.
1031 exchanges can be a little confusing when you try to figure out all of the timelines and regulations, but once you understand the basic concept, it really isn’t all that difficult. Every real estate investor should at least be aware of 1031 exchanges, and if you are not familiar with how they work, then I suggest that you read our article: Defer Taxes with 1031 Exchanges. . It won’t always make sense nor will it be possible to use them in every situation, but 1031s can save investors thousands in taxes if used properly.