No, not at all. While the discussion (if you can call it that) in Washington is for more streamlined tax parity, the new tax rates overwhelming approved in the American Taxpayer Relief Act of 2012, and signed into law on 1/3/2013, had little impact on 1031. If anything, it is a tax strategy not to be missed!
What has changed is that the tax rate for “certain high-income taxpayers” will now be 39.6% for ordinary income and short-term capital gain and 20% for long-term capital gains. High earners are those individuals with incomes over $450,000 for married persons filing jointly or $400,000 for individuals filing separately. Head of households get a small advantage with their number coming in at $425,000. After 2013, these amounts will be indexed for inflation.
Let’s not forget the 3.8% tax on net investment enacted by the Affordable Healthcare Act. This tax applies to net passive and investment income of taxpayers with incomes over $200,000 for individuals or $250,000 for married persons filing jointly. Note the lower threshold!
In an ordinary sale of a long term capital asset, most taxpayers will be subject to a whopping 23.8% plus any state capital gains tax. Typically these range from 7%-9% making the total exposure in excess of 30%. That’s a pretty big bite after you have paid a sales commission in the 6%-10% range.
High-income taxpayers have a greater incentive to defer capital gain under Section 1031 because the cost has gone up and don’t forget that un-recaptured depreciation is still at 25%. The Power of Section 1031 just got turned up a notch!