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Transactions in Connection with Exchanges:

Capital Gain Planning: Transactions at capital gain rates results in significant tax savings because capital gain rates are much lower than ordinary income rates.  

Income Tax Rates: The ordinary income of an individual taxpayer is taxed at progressive rates of 10%, 15%, 25%, 33% and 35%. Long-term capital assets held for a year and a day are subject to tax at a 0%, 5% and 15% for taxpayers in the 10%, 15% and above 15% tax brackets, respectively. Short term capital gains are subject to tax at ordinary income rates. Collectibles are taxes at 25% and 28% rate for the un-recaptured of Section 1250 gain.

Capital Gain and Capital Loss Netting: Current capital losses offset capital gains from the same rate class, e.g. a 15% capital gain offsets a 15% capital loss dollar for dollar. However, a 15% capital loss partially offsets a 25% capital gain. Also, a capital loss carry-forward offsets the highest rate of capital gains. For example, a $100,000 capital loss from a 15% class which is carried forward from last year to the current year can offset a $100,000 25% capital gain dollar for dollar. 

Converting Ordinary Income into Capital Gains: One example of converting ordinary income into capital gains is on the sale of depreciable equipment. Typically, the gains from the sale of the equipment are taxed at ordinary income tax rates. Exchanging equipment allows businesses to eliminate, not just defer, depreciation recapture.

Redemption Versus Sale of Partnership Interest: In the case of a LLC or partnership, where one of the owners cashes out of the entity, the method that he or she chooses may radically affect his or her net cash in hand. On a sale of a partnership interest, the gain will include his shares of hot assets, including depreciation recapture at the effective tax rate. On redemption by the partnership or LLC, the redeemed partner is taxed at the capital gains rate.

Sale of an Option: An option is used to gain a commitment from the owner of a parcel of property that they agree to give the right to another individual (optionee) to purchase their property for a set period of time. Selling an option to purchase property at a gain, where the option was held for more than one year, will result in capital gain taxes; whereas, if the taxpayer exercises the option and sells the land before more than one year has passed, the gain will be taxed at the ordinary income rates. 

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