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We may sell some vacant land at a gain of $160K this year(LTCG). I am considering postponing the payment until 2002 since this year our income is high.

Question #1: If our earned income next year is $15K (married filing jointly) and we include the LTCG of $160K, how will the LTCG rates apply? Will we get the 8% rate on part of it up to total income of $43850 (or whatever it is next year) and then 20% on the remainder?

Question #2: If I do take payment Jan 1, 2001, how much imputed interest will I have to show if the land sale actually happens on, say, Nov 1, 2001? Can I calculate it as 2 months at .5% per month (simple interest) on the total selling price?

Thanks in advance
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Question #1: If our earned income next year is $15K (married filing jointly) and we include the LTCG of $160K, how will the LTCG rates apply? Will we get the 8% rate on part of it up to total income of $43850 (or whatever it is next year) and then 20% on the remainder?


Your thinking is basically correct, but needs a little tweaking. First, you will only qualify for the 8% LTCG rate if you owned the property for 5 years before selling. If less than 5 years, you'll pay 10% LTCG up to the upper limit of the 15% tax bracket and then 20% on the remainder. Second, the upper limit ($43850 or whatever) is based on taxable income, not total income. You need to consider adjustments, deductions, and exemptions.

Ira
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Excellent! Thanks, Ira, for verifying that this strategy is worth pursuing. I made an Excel spreadsheet to calculate Schedule D numbers but it's really tough to get all the "if.." and "unless..." logic in correctly. I wanted to be sure I understood how the spreadsheet should work. And being compulsive and anal, I don't trust the tax software (Quicken, etc) to do it correctly.
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And being compulsive and anal, I don't trust the tax software (Quicken, etc) to do it correctly.

Actually, the TAX software (TurboTax, TaxCut, etc.) should all do this effortlessly in their planning modules. I can't vouch for the tax modules in Quicken, Microsoft Money, etc.

If you want to try this on your own, the draft version of the 2001 Schedule D should be available at the IRS web site in the tax professionals area -- http://www.irs.gov/bus_info/tax_pro/dftform2.html.

You can then follow the IRS logic as you create your spreadsheet.

Ira

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