How does the Jobs & Growth Tax Relief Reconciliation Act of 2003 affect 1031 exchanges?

Congress passed, and President Bush signed, the Jobs & Growth Tax Relief Reconciliation Act of 2003 – and one of the changes is a reduced capital gains tax rate (for those investments held for longer than one year, including real estate): It was 20%, but now it’s 15%. But remember, the gain on your property consists of more than just appreciation, it usually also contains depreciation that you’ve claimed over the years – and the tax rate on the recapture of depreciation is still 25%.

So anyone selling real estate that closes after May 5, 2003, and has owned the property at least one year and a day, will be subject to a lower capital gains tax rate of just 15%. For those people in lower tax brackets (single up to $28,000 and married up to $56,000), the capital gains tax rate is even lower: 5% now, and 0% for 2008. But the impact of depreciation and its recapture can be significant.

--The Experts

TEE-Shots are Tips from the Exchange Experts that are designed to make you think about, and ask questions about, the 1031 exchange process.