Any plans for the end of the year? Anything to think about, aside from foie gras, champagne and other good stuff to share with family and friends during the holidays? Well, just in case you forgot, let me remind you of one little thing that will not be featured on your New Year’s eve menu but will definitely get your attention when the fireworks signify the last second of 2012… It is something that some Washington forecasters baptized the “Fiscal Cliff”. Sounds scary. It is.
I am sure you heard about it, you read about it. How could you not, the deadline is less than five months away, five months during which Democrats in the Senate and Republicans in the House are going to play ping pong with their votes on this poisonous issue. If you need a refresher, here is a quick review of what the so-called “Fiscal Cliff” is all about. That thrilling term refers to the conundrum that we, “The People”, our representatives in Washington, and of course the Administration will be confronted with when the bell rings 12 times on December 31st.
At that very moment––and hopefully well before it if we want to stay clear of the cliff––we can either move ahead with a bunch of increased taxes and spending cuts which will certainly affect growth and even possibly drive the economy into another recession… Or forget about some scheduled tax hikes and spending cuts, which would further feed the deficit and possibly provoke a nasty crisis. Which do you prefer?
Among the laws scheduled (at this point) to change at the turn of the new year are the so-called Bush-era tax cuts and, as part of them, the famous capital gains tax rates which get the attention of all homeowners and particularly those of us whose taxable income exceeds $250,000. If I am to believe in all the press I have been reading over the last month or so on the subject, many wealthy homeowners are worried about the possibility that the tax break may not be extended past 2012. So much so that a good number of them are rushing to put their home on the market in order to try to close the sale before the end of the year.
I don’t know many wealthy people who are not smart and I don’t know many smart people who would get stuck with a bad capital gain situation on their own residence, but it can happen. At this point, the capital gains rate stands at 15% but could revert back to 20% if the tax break is allowed to expire in five months. In other words, a homeowner who sold for, say, $10M a property he bought for $4 M and meets all requirements in terms of time of occupancy, would be exposed to a tax bill of $275,000 more on the $5,500,000 gain ($6M – possible $500,000 married couple exclusion). Oops! Obviously rich people did not get rich by wasting that kind of money. Hence the legitimate concern.
Is this scenario likely to happen? No. In fact, there is probably no one in Washington seriously thinking that the axe is going to fall on January 1, 2013. It would not be the Washington way! Since no one would benefit from forcing the issue, especially in an election year, it is reasonable to assume that the Fiscal Cliff time bomb will be conveniently pushed under the rug, one more time. Nobody wins, but nobody loses. Mission accomplished.
So, unless we have a miraculous 11th hour deal, be prepared for an extension of the tax breaks, possibly until the fall of 2013. You may want to keep this article because it may very well still be timely and relevant a year from now…. In fact, you know what, maybe I will use it again for my blog, same time next year!