In our current economic climate, many of you are holding capital assets that are worth less than several years ago.  With that in mind, we wanted to advise you of a potential tax-saving strategy.

The current long-term capital gains rate is 20 percent for assets that have been held for more than one year.  Following the tax restructuring act of 1997, a reduced 18 percent capital gains tax rate will apply to capital assets that are acquired after December 31, 2000, and are held for five years. Unfortunately, the reduced rate does not automatically apply to capital assets purchased before that date.  However, an election is available to qualify for the 18 percent rate by treating assets held on January 1, 2001, as sold and repurchased on January 1, 2001, regardless of when the assets were purchased.  The assets for which the election is made will be eligible for the lower capital gains rate beginning in 2006.  If you have any significant capital assets that you plan on holding for more than five years, you may ultimately pay less tax by converting these 20 percent assets into 18 percent assets even though any gain resulting from this deemed sale is subject to tax on your 2001 income tax return.  You may make the election for an asset, which, if sold, would result in a loss.  However, if the election is made, the loss is neither recognized nor preserved through a basis adjustment. 

Perhaps more importantly, if you have current year losses in your portfolio (or loss-carry-forwards), which would normally be limited to $3,000, those losses could be utilized to offset some or all of the gain recognized by making the election.  By sheltering the gain from the deemed sale with existing losses, you can reduce or eliminate the tax liability, and the election increases basis in the assets to fair market value on January 1, 2001.

Qualifying assets include all investment assets such as stocks, bonds, or mutual funds and certain business assets. If you have such assets that you plan on holding for at least five more years, or if you have carryforward or current year capital losses, it would be wise to consider making this election.

Please do not hesitate to contact our office if you have any questions or would like to discuss this election in more detail.