Tax and financial advice from the Silicon Valley expert.

Should you take long-term capital gains in 2010?

For many taxpayers, 2010 might be their last chance to pay a “bargain” 15% federal tax rate for long-term capital gains. Individuals who have appreciated assets should consider selling them this year and paying the tax for 2010. Since 2010 is more than half over, it’s time to think about year-end tax planning. Some transactions take months to execute, so the time to start taking action may be now.

The Bush tax cuts enacted in 2001 are expiring after 2010. If Congress does nothing, the maximum federal long-term capital gains rate will increase from 15% to 20%. That’s a 33 1/3% increase! Some low income taxpayers are actually currently eligible for a 0% rate for long-term capital gains.

When planning to take long-term capital gains during 2010, be aware that the “wash sale” rules disallowing losses when the same or similar property is sold and repurchased during the period 30 days before and 30 days after selling an asset does not apply to gains. In essence, you can elect to report gains for your property by structuring a sale followed by a repurchase. There is still a possibility the IRS could challenge such a transaction on a substance versus form argument, especially for transactions with related parties.

When evaluating whether to sell and repurchase property, consider whether selling expenses could exceed the tax benefit from the transaction.

President Obama has proposed extending the Bush tax cuts for married persons filing joint income tax returns who have adjusted gross income of less than $250,000 and for single persons with adjusted gross income of less than $200,000. We probably won’t know if Congress will enact this proposal until late 2011. We have seen that Congress is finding it difficult to pass much tax legislation this year, including extension of the estate tax and many tax extenders. It may be wise to take defensive action.

A 3.8% Medicare tax on investment income of high-income taxpayers, including long-term capital gains, has already been enacted effective in 2013.

When the stock market and real estate markets are weak, it seems strange to talk about tax planning for long-term capital gains. The value changes for items are uneven. Some taxpayers could still be holding substantially appreciated property, like Google stock that they bought shortly after the company went public, or a rental home they bought thirty years ago.

Always consult with a tax advisor before making a major tax planning decision.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Tax and financial advice from the Silicon Valley expert.