THE PAST, PRESENT AND FUTURE OF 1031 EXCHANGES
In the United States, the capital gains tax (“CGT”) goes back to 1913, when Congress imposed a new 7% tax on all income following ratification of the 16th Amendment. 1 “Income” then included what we separately call “capital gains” today. Despite well-funded legal challenges to the federal income tax, the law prevailed. 2
Over time federal CGT rates ultimately were treated as distinct from income tax. Today, an individual’s CGT is based on the length of time an asset is held and the overall income of the taxpayer. There is also a higher bracket for paper gains, or unrealized gains, from past deductions of depreciation. Many assets subject to CGT, namely shares in corporate stock, are already subject to corporate taxation. After the corporation is taxed, our dividends as investors
are taxed again, followed eventually by a final CGT upon sale. Secondly, much of what we call appreciation could be attributable to inflation. In real economic terms, if we recognize a gain on an asset whose value merely kept up with inflation, we have not truly experienced the gain. Yet we are taxed as if we had. CGTs are asymmetrical in that all current recognized gains are taxed immediately, while offsetting
WHAT IS A CAPITAL GAIN? A capital gain is simply the profit realized when an asset is sold, typically because the asset has appreciated in value. When you buy a nugget of gold for $500 and later sell that same nugget for $1,000, you realize a capital gain of $500.
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