Recognizing Capital Gains This Year and Deferring Capital Losses

Right now, the maximum federal tax rate on long-term capital gains is 15%. Absent Congressional action, starting next year, the maximum rate on long-term capital gains will increase to 20% (or 18% on gains from assets held for over five years). Of course, we do not know for sure that the rate will go up, but we think it is likely.

Of course, investment moves should not be made solely to capitalize on the current low capital gains rates, but if you think that the long-term capital gains rates will increase next year and you are planning to sell sometime in the near future anyway, here are some tax planning strategies to consider.

If you own appreciated long-term capital gains securities (ones you have held for more than a year) that you intend to sell within the next few years, you might consider selling them during the remaining months of 2010 to recognize those gains at 15%. If you think a security will continue to appreciate, you can immediately buy it back. This will step up your tax basis to the current value at a low 15% tax cost. Only gains beyond this value will be taxed at the anticipated higher rate. On the flip side, if it otherwise makes investment sense, consider waiting until 2011 to sell loss securities so that the losses will offset higher taxed long-term capital gains and possibly up to $3,000 of higher taxed ordinary income (we expect those rates to go up as well).

Installment sales of certain long-term capital gain property (such as a piece of raw land you have held for over a year) provide a number of opportunities to capitalize on the 15% long-term capital gain rate for 2010 should the rate increase next year as anticipated. In fact, installment sales that originate in 2010 offer a rare chance to use 20/20 hindsight in that you have until the extended due date of the 2010 Form 1040 to decide if you want to report the full gain in 2010 and pay taxes at the current 15% rate or instead report the gain when you receive payments on the installment note and pay taxes at whatever rate applies during that year.

The current low tax rates combined with the current low applicable federal interest rates makes 2010 an especially good year to consider making installment sales of capital assets to family members.

In the case of a pre-2010 installment sale (for which it is too late to elect out of installment treatment), it is still possible to accelerate the remaining gain into 2010 if you take certain actions before the end of the year.