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Double the Capital Gains Taxes for Colorado Investors?

New Proposed Capital Gains Rate News from Boulder Financial Realty and Catherine Chipman, Broker.

Biden’s Proposed Capital Gains Tax Could Exceed 50% In 11 States

You earn a capital gain when you sell an investment or an asset for a profit. When you realize a capital gain, the proceeds are considered taxable income. The amount you owe in capital gains taxes depends in part on how long you owned the asset, your depreciation you are forced to take and pay back, and any capital expenditures (versus repairs) that may have adjusted your “basis” on which to be taxed.

Forbes wrote: “President Joe Biden floated a bevy of tax increase proposals as part of the president’s FY 2025 budget. That budget comes in at a cool $7.3 trillion, and someone has to pay for it. That likely means serious tax increases, and the president is not shy about proposing them. Much of his focus is on getting higher income taxpayers to pay more, but the one that seems to be capturing the biggest headlines is his planned reboot of capital gain taxes. Higher federal rates plus state taxes will mean paying more than 50% in some cases, higher than it has ever been in United Stated history.

Capital Gain Tax Increase

If you sell your stock, property or crypto and you’ve held it for more than one year, you get a classic tax break. Long-term capital gains are taxed at lower rates than ordinary income. But how much lower depends on your income. If your taxable income is $47,025 or less, you pay zero tax on your long-term capital gain. If your taxable income is from $47,026 to $518,900, you’ll pay 15% on your long-term capital gain – and that includes all the gain on your home. If your taxable income (or gain) is more than $518,900, you pay 20% on your long-term capital gain underthe current law.

But before we discuss Biden’s proposal to increase capital gains tax high than they have historically ever been, it’s important to note that many long-term capital gains are also subject to the net investment income tax, sometimes called the Obamacare tax. That is another 3.8%, bringing the typical top tax rate on long-term capital gains to 23.8% plus 4.4% in Colorado State Capital Gains Tax Rate- 28.2% total. This 3.8% net investment income tax applies if you have modified adjusted gross income above $250,000 or if you are married and filing taxes jointly. If you are single, the threshold is $200,000.

How would the capital gains tax change under Biden’s FY 2025 budget proposal?

For high income taxpayers, the long-term capital gains tax could nearly double to 39.6%. That proposed capital gains rate increase would apply to investors who make at least $1 million a year. In fact, it is possible to go even higher, as high as 44.6% or 50% in 11 states! Portions of the General Explanations of the Administration’s FY 2025 Revenue Proposals note that for some taxpayers, if you add several proposals together, they could increase the top marginal rate on long-term capital gains and qualified dividends to 44.6% which could impact your net worth at the time of sale of your real estate.

The Daily Mail noted that there are 11 states where Americans will face at least 50% capital gain tax under this plan. If the Biden plan passes, for the taxpayers caught by the new rule, here are the combined state and federal rates taxpayers might pay on their capital gains.

1031 Exchanges

Under Section 1031, if you exchange real estate for like-kind real estate, the gain is postponed until you sell your replacement property. Properties are of like-kind if they are of the same nature of character, whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. Starting in 2018, swaps in crypto, exchanges of private assets no longer don’t qualify. Only real estate qualifies, and it must be of like-kind. However, if you rent part of your home, collect and report rental income, that portion of your residence may qualify for a 1031 tax deferred exchange.

Still, improved real estate can be exchanged for unimproved real estate. And city real estate can be exchanged for a ranch or farm. The real estate industry has counted on this provision for generations, but President Biden’s FY 2025 budget would repeal this code section as well. The White House has said that it “amounts to an indefinite interest-free loan from the government.” Not good for investors and home owners whose largest “nest egg” is often in real estate and a primary source of their net worth and generational wealth.

Wait there is more….other Proposed Tax Increases

President Biden has a range of other proposed tax increases. For example, he wants to impose a minimum tax on billionaires. The provision is controversial in part because it is a type of wealth tax rather than a traditional income tax. Despite the billionaire label on the proposal, this new tax would also apply to people who are wealthy but a long way from being a billionaire. If passed, the billionaire tax would be a minimum of 25% for households with net worth exceeding $100 million.

Currently, the top federal rate on ordinary income is 37%. Biden has proposed increasing it to 39.6%, which was the top rate back in 2017. Starting in 2018, President Donald Trump signed into law the Tax Cuts and Jobs Act that made many cuts, including the 2.6% cut to the top ordinary income tax rate. Notably, though, the new 39.6% rate is only supposed to apply to taxpayers making $400,000 or more.

President Biden is also proposing a tax increase for people making more than $400,000 a year to help finance Medicare. The increase would hike the Medicare tax rate from 3.8% to 5%. ” (Source: Forbes Magazine.)

Colorado Real Estate Investors May Be Impacted

May 2024 Bipartisan property tax reform passed in Colorado, offering some support with property taxes which pales in comparision to the new proposed capital gains increase. SB-233 will reduce property taxes by $1.3 Billion in Colorado. However, capital gains taxes could more than double in Colorado if the proposed budget passes by the current administration. Although it is only 4.4% in Colorado for capital gains, the Federal Capital Gains Rate may double and could reach or exceed 44.6% in Colorado compared to 20% of the past. All this makes you wonder what the World Economic Forum meant whent hey said, “we will own nothing and be happy.” Boulder Financial Realty helps sellers and investors get strategy with these incoming changes and works with your tax, financial and legal professionals in your best interest.

Read more here about how Capital Gains changes can impact your take home in Colorado.

When calculating the holding period—or the amount of time you owned the asset before you sold it—you should count the day you sold the asset but not the day you bought it. For example, if you bought an asset on February 1, 2023, your holding period started on February 2, 2023, the one-year mark of ownership would occur on February 1, 2024. Additionally, Initiative 50 has been approved for the November ballot and would impose a hard 4% cap on the annual growth of all property tax reven

What is you purchased a multi unit in Boulder in 1985 for $100K and now it’s worth $1.1m? That’s a $1,000,000 capital gain (not including depreciation payback and adjusted basis or homestead exemptions).

2023 Long-Term Capital Gains Tax Rates

Tax Filing Status0% Rate15% Rate20% Rate
SingleTaxable income of up to $44,625$44,625 to $492,300Over $492,300
Married filing jointlyTaxable income of up to $89,250$89,250 to $553,850Over $553,850
Married filing separatelyTaxable income of up to $44,625$44,625 to $276,900Over $276,900
Head of householdTaxable income of up to $59,750$59,750 to $523,050Over $523,050

2024 Long-Term Capital Gains Tax Rates

Tax Filing Status0% Rate15% Rate20% Rate
SingleTaxable income of up to $47,025$47,026 to $518,900Over $518,900
Married filing jointlyTaxable income of up to $94,050$94,051 to $583,750Over $583,750
Married filing separatelyTaxable income of up to $47,025$47,026 to $291,850Over $291,850
Head of householdTaxable income of up to $63,000$63,001 to $551,350Over $551,350

Short-Term Capital Gains Taxes

When you own an asset or investment for one year or less before you sell it for a profit, that’s considered a short-term capital gain. In the U.S., short-term capital gains are taxed as ordinary income.

That means you could pay up to 37% income tax, depending on your federal income tax bracket.

What Is a Capital Gain?

A capital gain happens when you sell or exchange a capital asset for a higher price than its basis. The “basis” is what you paid for the asset, plus commissions and the cost of improvements, minus depreciation.

There is no capital gain until you sell an asset. Once you’ve sold an asset for a profit, you’re required to claim the profit on your income taxes. Capital gains are not adjusted for inflation.

Here’s how capital gains are calculated:

  • Find your basis. Typically, this is what you paid for the asset, including commissions or fees.
  • Find your realized amount. This will be what you sold the asset for, less any commissions or fees you paid.
  • Subtract the basis from the realized amount. If your sale price was higher than your basis price, it’s a capital gain. If your sale price was less than your basis price, it’s considered a capital loss.

What Are Capital Losses?

Capital losses are when you sell an asset or an investment for less than you paid for it. Capital losses from investments can be used to offset your capital gains on your taxes.

Like gains, capital losses come in short-term and long-term varieties and must first be used to offset capital gains of the same type.

For instance, if you have long-term capital losses, they must first be used to offset any long-term capital gains. Any excess losses after that can be used to offset short-term capital gains. You also may use capital losses to offset up to $3,000 of other income, such as earnings or dividend income. Unused capital losses can be carried forward to future tax years.

How Are Capital Gains Taxes Calculated?

You can calculate capital gains taxes using IRS forms. To calculate and report sales that resulted in capital gains or losses, start with IRS Form 8949.

Record each sale, and calculate your hold time, basis, and gain or loss. Next, figure your net capital gains using Schedule D of IRS Form 1040. Then copy the results to your tax return on Form 1040 to figure your overall tax rate. (Source: Forbes Magazine)

Capital Gains Taxes on Owner-Occupied Real Estate

If you sell your home for a profit, that’s considered a capital gain. But you may be able to exclude up to $250,000 of that gain from your income, or up to $500,000 if you and your spouse file a joint tax return, whcih is called the Homestead Exemption.

To qualify, you must pass both the ownership test and the use test. This means you must have owned and used the real estate as your main home for a total period of at least two years out of the five years before the sale date. The two-year periods for owning the home and using the home don’t have to be the same two-year periods. Typically, you can’t take this exclusion if you’ve taken it for another home sale in the two years before the sale of this home.

In conlcusion, big changes could be coming down for local real estate investors and sellers. Contact us today at Boulder Financial Realty for a free market analysis, market and tax strategy that achieves your goals without breaking the bank.

Contact our Broker; [email protected] or by cel/text anytime 303-442-2626. We are Boulder’s Best Boutique Real Estate Brokerage serving buyers, sellers and investors in the Boulder County Real Estate Market since 1992.