Capital Gains Holding Requirements
The IRS Restructuring and Reform Act 1998 changed the holding period requirements, once again, for long-term capital gains. The holding period has been reduced to what it was prior to the Tax Payer Relief Act of 1997. Other than the holding periods, all the rules regarding qualification for capital gains treatment are the same.
NOTE: The effective date for the change in the holding period requirement to more than 12 months from more than 18 months, is January 1, 1998. The new legislation provides that most capital assets that are held more than 12 months, but not more than 18 months, are no longer subject to the 28% capital gains rate.
The capital gains tax rate is determined by the length of the holding period and whether you are in the 15%, or 28% or higher tax brackets for ordinary income. The capital gains rate increases from 10% to 20% when you go from the 15%, to the 28% or higher ordinary income bracket. Your ordinary income bracket is determined before adding in your net long-term capital gain. Thus, its not the spreading of timber income, but controlling your ordinary income that might keep your capital gains rate from increasing.
The following table may help to keep these changes straight. The table is based on the date the timber is sold or otherwise disposed of, how long the timber was held prior to disposal, and the tax rate on ordinary income.
| Date of Disposal | If holding period is more than: | And, if tax rate on ordinary income is: | Then capital gains rate is: |
| After 12/31/97 | 12 months | 15% | 10% |
| 12 months | 28% or higher | 20% | |
| After 12/31/05 and acquired after 12/31/00 | 5 years | 28% or higher | 18% |
| After 12/31/00 | 5 years | 15% | 8% |
| After 12/31/00 | 12 months but less than 5 years | 28% or higher | 20% |
| 12 months but less than 5 years | 15% | 10% |
Estimated Tax Payments - As a result of the retroactive elimination of the 18 month holding period you may find that you have overpaid your estimated tax for the first half of 1998. For example, if you sold a capital asset after January 1, 1998 and the asset was held more than 12 months but not more than 18 months you may have based your April 15, 1998 estimated tax payment on the assumption that the gain would be taxed at either 15% or 28%, depending on what your ordinary income is taxed at. If this was the case, then decreasing the remaining estimated tax payments for 1998 should be considered.
Inherited Property - A technical correction made by the IRS Restructuring and Reform Act of 1998 provides that, in most situations, inherited property will be eligible for the lowest applicable capital gains rate (i.e. 10% or 20%) because the property will be treated as if held for more than 12 months.
Special election for capital assets acquired in tax years beginning before January 1, 2001 - The new capital gains rates of 20% or 10% will continue to apply after December 31, 2000, provided the regular long-term holding period has been met (i.e. 12 months). However, it may be possible to qualify for a "special long-term capital gains rate" of either 18% or 8% (for individuals in a 15% tax bracket) if you have held the asset for more than 5 years.
NOTE: It should be noted that the date the five-year holding period starts is different for individuals in a 15% tax bracket than for individuals in higher tax brackets.
The special 8% rate applies if you are in the 15% tax bracket and you hold the asset for more than 5 years, even if you acquired the asset before January 1, 2001.
If you are in 28% tax bracket or higher, the five-year holding period only applies to assets acquired after December 31, 2000. However, a special election may allow you to treat property acquired before December 31, 2000 as having been acquired on January 1, 2001.
In order to take make this election you must treat the asset as if it were sold on January 1, 2001, at its fair market value as of this date. Any income tax due on the gain from this hypothetical sale must be paid. However if a loss were to result, it is not recognized, that is you can't deduct the loss. The asset's new acquisition date would hen become January 1, 2001.
As a result of this hypothetical sale the basis of your timber is stepped up to the fair market value that was was used for the sale. If a loss had occurred from the sale the basis in the timber would carryover from that prior to the sale.