Should you sell investment assets in 2000, or hold onto them for five (5) years or more? Before you decide, you should consider the impact of the new five (5) year holding period rules. These rules were passed in the 1997 Tax Act, but only become effective as of January 1, 2001.

Gain or loss from the sale or exchange of a capital asset can be either short-term or long-term, depending on how long you have held the asset. If you have both long-term and short-term gains or losses for the year, each type is reported and netted separately before being netted together. When capital gains exceed capital losses, the overall gain is included with your other taxable income, but is generally subject to a maximum tax rate of 20% for all sales of long-term capital assets (10% for taxpayers in the 15% marginal tax bracket).

Effective for sales after December 31, 2000, capital gains on property held for more than five (5) years will be taxed at a maximum rate of 18% (8% if you are in the 15% marginal tax bracket). For this special lower rate to apply, you must either have acquired the property after December 31, 2000, or elected to treat property purchased before January 1, 2001 as acquired on January 1, 2001. If you are in the 15% marginal tax bracket you need not have acquired the property after December 31, 2000 for the special lower rate to apply.

As noted, you can elect to treat any tradable stock or other capital asset held on January 1, 2001 as having been sold on that date for its then fair market value. For publicly traded securities the closing price on January 2, 2001 governs. The asset is treated as having been reacquired on the same date, allowing you to take advantage of the lower capital gains tax rate if you then hold the property for at least five (5) more years (if you are in a marginal tax bracket over 15%). No losses can be recognized, the gain will be reported on your 2001 return, you will have to pay the taxes due thereon by April 15, 2002, and you cannot sell the asset until after December 31, 2005 to qualify for the lower capital gain tax rate.

The election is intended to allow taxpayers to "freshen up" capital assets for purposes of qualifying for the lower rate more quickly. You should generally take advantage of this election if there is little or no gain on the asset, you intend to hold the asset for at least five (5) more years, and the asset is anticipated to appreciate significantly.

Please give us a call if you want to discuss the advantages and disadvantages of making this election for your particular situation.