Envisioning Democratic control of both the White House and Congress in 2008 — along with a big jump in the capital gains tax rate — some investors are selling properties to take advantage of today's historically low 15% rate, says David Mumford, senior principal at The Mumford Co., a hotel brokerage in Newport, Va.
“The highest number I've heard is the rate doubling to 30%,” says Mumford. “That has certainly caused my phone to ring more from clients who were on the fence about what to do with their assets. If they were considering a sale, they're accelerating that process.” A few investors have even told Mumford they're afraid a capital gains rate hike will be made retroactive to 2008. If that were to happen, says Mumford, “the hue and cry would be loud and long.”
Bill Murney, managing director in the Phoenix office of Molinaro Koger, a national hotel, predicts that if Democrats win big in 2008, the capital gains tax rate will reach 28% to 30%. That's why some of his clients also are cashing out.
“People who are selling properties that might have been 1031 exchange buyers have decided to just pay the taxes and reinvest,” he says, unless they must pay back or recapture claimed depreciation deductions. “But if it's strictly a capital gains issue, they're smart paying the taxes today given the cloud on their horizon.”
If office investors are selling for capital gains reasons, they haven't told the Building Owners and Managers Association, says Laura Horsley, the Washington, D.C. group's spokesperson. “We're concerned Congress will target capital gains,” she says, “but we haven't seen evidence of people doing that.”
Nor has Brian Eliason, CEO of Eliason Inc., a St. Germain, Wis., company that specializes in 1031 exchanges. “I've heard that as well — that investors are selling and paying the tax now — from a number of people,” he says, “but we've not seen that at all. Our 1031 business has picked up.”
The tactic doesn't make sense, he says, because investors can continue to exchange properties until they die. If their heirs sell, they pay taxes on only the increase in value from the time they received the property, not from when the original investor purchased it.
The capital gains tax rate, which applies to the sale of assets held for longer than one year, has long been a revenue target for politicians. For much of the 1970s and early 1980s, the maximum rate was 49%. In 1982, under President Ronald Reagan, the rate fell to 20% for most taxpayers.
The Tax Reform Act of 1986 jacked the rate back to 28%. It held until 1997, when it dropped to 20% under President Bill Clinton. On President George W. Bush's watch in 2003, it fell to 15%, where it's set to remain through 2010.
As investors speculate, if a Democrat wins the White House does it matter which one? “I've yet to hear it singled out in terms of a specific candidate,” says Mumford. But he adds that if Sen. Hillary Clinton wins, it's possible she'll follow her husband's lead and raise the rate only slightly. “President Clinton wasn't as radical in terms of his tax policies as maybe Sen. John Edwards or Sen. Barack Obama might be,” Mumford says.
None of those three hopefuls returned calls to explain their tax position.