Timing is key factor when selling investments

by W. David Myers

for the Business Journal

When it comes to investing, timing is everything. In addition to considering an investment's selling price, you should pay attention to whether selling makes sense from a tax standpoint.

First of all, let's define capital gains. A capital gain is the profit made on the sale of a nonbusiness investment that increased in value.

Long-term capital gains are taxed at 20 percent, which is a favorable tax rate. However, for an investment to be considered long-term and qualify for this rate, you must have held the investment for one year. So, unless you're holding a volatile stock that might plummet at any time, be sure to keep it for at least a year. Even if the price drops a little, you may cut taxes on the profit nearly in half if you hold it.

If you are in the 15 percent tax bracket instead of 28 percent bracket, the long-term capital gains rate is 10 percent. Be aware that gains on collectibles such as antiques, artwork, stamps, etc., are taxed differently. The maximum rate for these items is 28 percent if you own it for more than a year.

Long-term capital gains taxes drop again in 2001. Assets you purchase and hold for five years will be taxed at 18 percent when sold or only 8 percent if you are in the 15 percent tax bracket.

Timing your investments is also important at the end of the year. If you made big gains this year, review your portfolio for losses. You may want to sell the investment that isn't expected to rebound from losses to offset your gains.

If you end up with more losses than gains, you can use $3,000 against other income and carry over the rest to next year. Also, check to make sure you have paid enough estimated taxes to cover your gains. You may be penalized if you haven't.

If an investment increases in value but doesn't pay much income to you, it won't be taxed until you sell the investment. Time the sale carefully and you can receive the most favorable tax treatment. For instance, wait to sell it until a year when your tax rate is low or give it to your children older than age 14. The child can sell the investment and be taxed at a lower rate.

If your gross estate is less than $650,000, you may even consider keeping the investment for your beneficiaries. It will pass to them tax-free at your death.

Timing is also important when investing in mutual funds because mutual funds often make capital gain distributions at the end of the year.

If you buy into the fund before the distribution date, you'll be taxed on the gains that are distributed. It may be better to delay your purchase until after the first of the year.

Earnings on taxable bonds, which are issued by companies wishing to raise capital, are taxed annually even though you receive no cash. If you purchase the bonds through a tax-exempt Keogh or Individual Retirement Account, you could avoid taxes until the funds are withdrawn.

These are only a few tax tips for investors.

Work with your investment and tax advisers to consider all the factors involved with buying or selling an investment. After all, you don't want more of your earnings than necessary to go to Uncle Sam.

(David Myers is a partner with the certified public accounting and business advisory firm of Whitlock, Selim & Keehn LLP.)

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