A TAX UPDATE!!!

I recently heard that there is some talk going on in Washington, D.C. about an adjustment to the tax law as it concerns long term capital gains.

Now, there is talk about indexing the cost basis of any capital asset for capital gains purposes. The way the law is now is you take the proceeds from the sale of a capital asset and subtract the cost basis to arrive at the capital gain amount. Depending on your tax return the income is either taxed at your ordinary income rate or the capital gain rate, whichever is lower. It does not matter if you held the asset for one year or forty years. Assets held for one year or less are subject to ordinary income rates and called short term capital gains. This discussion pertains to long term capital gains for assets held for longer than one year.

Under the old rules, if you bought an asset in 1970 for $100,000 and sold it in 2018 for $500,000 you would have a long term capital gain of $400,000. Under the proposed legislation the asset that you bought in 1970 would be adjusted each year for the increase in the index for the cost of living. So, the asset you bought in 1970 for $100,000 might now have a tax basis of $175,000 yielding a long term capital gain of only $325,000. At a 20% maximum long term capital gain tax rate that is a tax saving of $15,000.

By the way, I sold a home this past month in the Santa Clarita area and the client is very happy.