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Now that the fiscal cliff legislation is on the books, we need to talk about what are you going to do for capital gains taxes in 2013 and going forward? What are the stakes?
Well, think about it. The new capital gains tax is 20%; plus a 3.8% unearned Medicare reimbursement tax right, so it’s 23.8%. In California we have 13.3; so that’s 23.8 plus 13.3 is 37.1% on capital gains in California. Then for ordinary income we have 39.6; plus 3.8 to Medicare; plus 13.3, that’s something like 56.7. It’s still an almost 20% difference between ordinary income taxes and capital gains. But what are we going to do about capital gains? How are we going to mitigate them?
Well, first of all, if you’ve got real estate you’re going to try even more than before to do tax deferred exchanges. We are going to spend a lot of time advising people about tax deferred exchanges. Number 2, a lot of charitable structures are going to look a lot more attractive. Charitable remainder trusts have fallen into disuse in the past 5-6 years. Not anymore, if the capital gains tax rate is 37.1%; I think people are going to be highly motivated to want to come to us before the deal is solid, really as far in advance of the deal as possible and we’re going to talk about putting stock in the corporation, real estate, potentially LLC interest; definitely not S corporation interest into a charitable remainder trust, maybe not all of it; maybe a piece of it but 37.1% is a big number. What other things? Well what if you have an asset that ‘s going to be sold more than 2 years and a day from now, if you come to us for more than 2 years and 1 day before the sale; we have a structure that will work, based upon what’s called the restriction on related party installment sales. It’s a wonderful structure; it’s on the face of the Internal Revenue Code and if you’ve got that kind of timing, think about the low interest rates right now. You can do a 3 year note to a children’s trust for .23%, so on a 4 million dollar installment sale, which I was working on earlier today, that’s $9,200.00 a year for 3 years to do a sale of 4 million dollars and have no tax when the sale occurs.
Capital gains tax planning (is) much more important going forward after the fiscal cliff legislation.