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Sell property ahead of tax hike?

By Judy Martel ·
Thursday, November 8, 2012
Posted: 1 pm ET

Real estate investors are facing the possibility of higher taxes on capital gains in 2013, leading some to wonder if this is the year to sell.

Next year, the capital gains tax is scheduled to rise from 15 percent to 20 percent for investments held longer than a year. Add to that President Barack Obama's proposed 3.8 percent Medicare surtax for high-net-worth individuals, and the tax bill could increase by 8.8 percent for some investors.

But before letting the tax tail wag the dog, Barry Taylor, certified financial planner professional at Integral Financial Solutions in San Francisco, says investors should crunch the numbers and take into account the potential for rising real estate values.

Let's say you have a $1 million property with a taxable gain of $500,000, he explains. At the current 15 percent capital gains rate, you'd have a $75,000 tax bill if you sold it. Wait until 2013, and if the tax goes up to 20 percent, you would owe an additional $25,000. Looking at it from the flip side, "that million-dollar house would only have to go up another 2 ½ percent to recoup the extra tax," he adds.

If you're only selling because you're worried about the increased tax and if you believe the value of real estate is at the turning point and will begin to appreciate, you'd be wiser to hold onto the property, Taylor says.

"I don't believe in getting in or out of the stock market or real estate on the basis of the possibility of rising taxes," says Taylor. Instead, investors should take a longer view and stay on track to reach their ultimate financial goals.

Tax considerations are only one of the factors that go into deciding when to sell an investment, and Taylor says that if you're considering retiring or were already planning to rebalance your portfolio or reduce a concentrated stock position, it might be a good idea to do it this year while taxes are low. The same holds true if you were already planning to sell real estate or if you believe prices in your area will remain depressed for many years.

"Within our culture, there is an automatic response to avoid taxes, but the decision to sell should depend on lots of factors," Taylor says. "When you're talking about a larger-ticket item like a house, it doesn't have to go up much to recapture the increased tax."

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