I took a call last week from a past client that was concerned about the potential capital gains tax if they sold a parcel of land and did not conduct a Section 1031 Exchange. While our business is to facilitate exchanges, we are always happy to help our clients navigate tax code implications in real time. The caller acquired a large farm tract several years ago with 1031 proceeds. Now that they are older, they want sell a few parcels to generate cash while still keeping the farm running. Since their taxable income is relatively low, they were pleased to learn that individuals in the two lowest tax brackets — 10 percent and 15 percent — can sell long-term assets and pay zero percent capital gains tax.
Since my client did not know immediately what their tax bracket was, they were encouraged to learn that the 15 percent bracket for tax year 2012 goes up to $35,350 for a single filer; $47,350 for a head of household; and $70,700 for a married couple filing a joint return. If your total income including capital gains puts you in the 10 or 15 percent tax bracket, you qualify for the zero percent tax rate on long-term gains. For lower income earners, that is a lot of leeway to escape capital gains. Of course, your individual state tax regime will still apply. There are exceptions, for instance, previously depreciated rental income does not qualify for the zero percent treatment.
Even if you make more than the maximum for your filing status, you still might be able to take advantage of the zero percent rate. The reason is that the cutoff amounts are taxable income, not the larger adjusted gross income amount. Careful planners could transfer assets to lower earners (a spouse filing separately or a child) to avoid the capital gains tax. It can’t be done overnight and if Congress has its way, this provision of the code may disappear altogether.
As always, check with your tax professional for all the details.