I pose this question because the current Capital Gains Tax Rates are due to expire on December 31, 2010. The Jobs and Growth Tax Relief and Reconciliation Act of 2003 reduced the Capital Gains Tax (on appreciation) from 20% to 15%. This provision of the bill has been extended several times but is scheduled to “sunset” at the end of this year. Given the current economic conditions it seems likely that the Capital Gains Tax will increase in 2011, but to what rate?

This tax has been adjusted for some tax brackets since 2003. The latest modifications were in 2008. The current Capital Gains Tax is 0% for those in the 10% and 15% tax brackets; but the tax for these brackets is scheduled to revert to at least the pre-2003 rate of 15% in 2011. For those taxpayers currently above the 15% marginal tax bracket (25%, 28%, 33% and 35%) the pre-2003 Capital Gains Tax rate of 20% may be restored in 2011.

Could it be worse? For much of our history the Capital Gains Tax was significantly higher. Let’s look at some key historical points regarding this tax. In 1862 the office of Commissioner of Internal Revenue was established to assess, levy and collect taxes. In 1913 the 16^th Amendment of the U.S. Constitution gave congress the legal authority to tax income. At that time Capital Gains were taxed as ordinary income. Through the years the tax rates for Capital Gains followed many formulas, reaching a peak in the early 1970’s.

In 1978 Congress reduced Capital Gains rates to a maximum of 28%, where it stayed for almost twenty years! Only on May 7, 1997 was the rate reduced to 20% (10% for the lowest tax bracket). There were a few adjustments at certain points, but generally the rate stayed the same until May 6, 2003. At this point the Capital Gains Tax rate was reduced to 15% (5% for the 10% and 15% marginal tax brackets). In 2008 the tax for the 10% and 15% brackets was eliminated, for the higher brackets it remained at 15%.

There is another serious concern looming. The current tax brackets reduced in 2003 expire at the end of 2010 when they are scheduled to revert to the pre 2001 rates.

Current Tax Brackets: 10%, 15%, 25%, 28%, 33% and 35%

Pre-2001 Brackets: 15%, 28%, 31%, 36% and 39.6%

The Pre-2001 Capital Gains Tax Rates: 10% for the 15% bracket, 20% for all other brackets.

No one has a crystal ball to predict the future, but considering the state of the economy there is a possibility that the current tax rates will be allowed to sunset and we could revert to higher taxes again. There are two real challenges, what will the tax brackets be and what will the Capital Gains taxes be in 2011? A change in the marginal tax rates would affect and hurt all of us. An increase in the Capital Gains Tax could really hurt the real estate industry.

Our job as real estate agents is to educate the consumer, this is more important now than ever with the possibility of increased Capital Gains Taxes on future sales. Be sure when listing property for sale that you advise your client they will be subject to Capital Gains Taxes and that the tax rate could go up in 2011. Direct them to discuss the tax consequences of their sale with their accountant or tax advisor.

Also be sure to mention that it is possible to defer Capital Gains Taxes by doing a 1031 Exchange. Direct them to speak with a Qualified Intermediary to find out if this may help them.

Share information with your clients but be the source of the source, direct them to the appropriate professionals for financial issues and questions.