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Capital Gains Planning

Exchange Basics

Capital Gains Planning

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

Whether your business is an C Corporation, a Partnership or an individual capital gain tax planning firm reduces (1) the rate of taxes on your gains and (2) converts ordinary income into capital gains or tax exempt income.

C Corporations are subject to 35% rate of tax plus state taxes on both ordinary income and the capital gain. Corporations may deduct capital losses only to the extent that the corporation has capital gains for the year. A corporation's net capital losses may be carried back three (3) years and forward five (5) years.

Generally flow-through entities, such as partnerships, S Corporations and trusts, the income, gains and deductions are taxed to the owners, such as individual taxpayers. Currently, gains or losses from the sale of assets held for more than one year are taxed at 15% and gains from the sale of depreciable real estate are taxed 25% for that portion attributable to depreciation recapture.


  • Netting of capital gains against capital losses
  • Utilizing long term capital loss carryovers
  • Excess capital losses
  • Worthless securities
  • Partial exclusion for small business stock
  • Shifting ordinary to capital gains
  • Sale of depreciable real estate
  • Partnership Distributions
  • Dealer and investor issues
  • Sale of real estate to a partnership for development

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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