Despite the uncertainty caused during an important presidential election year, there have been ever-increasing signs of a slow but steady economic recovery. The improving economy, coupled with modest gains in the housing industry, have created ideal conditions, at least temporarily, for homeowners to consider selling. This window of opportunity could close quickly if President Obama is re-elected and his tax reforms are enacted.
One of the key arguments made by the administration is that passive income or profits from investments from capital gains, should be taxed the same as ordinary income. At present, the capital gains tax is only 15%.
For example, If a homeowner sells their home for a $100,000 profit, and doesn’t qualify for any exclusions, there would be a $15,000.00 tax on the profit.
If tax reform legislation is passed supporting the capital gains tax rate, the profit would then be taxed at ordinary income rates. This means a home seller that has adjusted gross income over $388,000.00, would be taxed at the maximum rate of 35%.
For example: If a homeowner was in the 35% tax bracket for their ordinary income, and they sell the same home for a $100,000 profit, they would now be paying $35,000. That’s an increase of $20,000, or 133%.
Worse yet, the maximum tax rate could increase. If that were to happen, the amount could be even greater. Just a few short years ago, it would have been nearly impossible to pass legislation similar to the President’s proposed Tax Reform. Now, with the massive U.S. deficit, and the default by European nations like Greece, that have similar problems, all proposed deficit reduction measures are being considered. Remember, it may take drastic measure to control the deficit, especially if the cost of borrowing by the U.S. Government to pay for the debt, increases.
It’s always important to consider the “What If'” and “Is it Possible” scenarios when making important financial decision. This is especially true for home owners that have decided to wait a few years for the real estate markets to improve. After all, the consequences of waiting can be significant, especially for owners of expensive properties, second-homes, and investment properties.