For some capital gains taxes have improved.

Posted: Wednesday, January 16, 2002

WASHINGTON (AP) -- Taxpayers with relatively modest incomes could take advantage this year of a new 8 percent capital gains tax rate for long-term investments they sold in 2001. Others will have to wait until at least 2006 to take advantage of another lower rate.

Beginning in January, 2001, taxpayers whose capital gains tax rate is 10 percent saw it drop to 8 percent for assets they have held for at least five years.

But that tax break is expected to apply to relatively few investors on their 2001 tax returns because income above $27,000 for a single taxpayer is taxed at a 15 percent rate. Only those taxpayers whose income from sources other than the capital gains is below $27,000 can qualify for the 8 percent rate.

Far more people are likely to be affected by a new 18 percent capital gains rate on investments made in 2001 or later and held for at least five years. Anyone, regardless of their other income, will be able to take advantage of it. Most gains on assets held longer than one year are taxed at a 20 percent rate.

A higher income taxpayer would have to wait until 2006 at the earliest to sell an asset purchased in 2001 to qualify for the 18 percent rate.

It gets even more confusing.

When Congress passed the law authorizing these new lower rates in 1997, it decided to give taxpayers a way to make their pre-2001 investments potentially qualify for the lower 18 percent rate without actually selling and repurchasing them. It's called a ''deemed-sale'' election and it's irrevocable.

''What it means is, I can take something I bought in 1993 and treat it as if I had bought it in 2001,'' said Jackie Perlman, senior tax research analyst at H&R Block.

There's a catch: The 18 percent tax on the gains so far would have to be paid in this year. So taxpayers who make the deemed sale election would owe taxes on the difference between their basis in the asset and its value on Jan. 1, 2001. While gains are reportable, losses are not allowed on a deemed sale. Future gains also would be taxed at 18 percent, if the asset is not sold before 2006.

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