President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 on May 28, 2003. The law passed Congress on May 23, 2003. The new tax act provides in part tax breaks for taxpayers with children, investors and small businesses. One major area that pertains to investment real estate is the reduction in capital gains tax. This new tax law could actually bring more investment properties to market, where the investor desires to cash out, but has not listed the property because of the taxable gain. The result would be more viable replacement properties available for the investor that wants to complete a 1031 exchange and continue to build wealth in real estate. Here is a brief description of some of the sections of the new law and more particularly on the reduction of the capital gains rates.

• For sales on or after May 6, 2003, the top long-term capital rate is 15% (a reduction from 20%). For the 10% or 15% tax bracket, the rate drops to 5%. A maximum rate of 25% still applies to long-term capital gains attributable to depreciation deductions claimed against the property (Section 1250 Recapture). As to the impact on the new law and the 1031 Exchange, some taxpayers will opt to be taxed at the lower level rather than acquiring replacement property. Most likely the impact will be seen in lower dollar transactions where the gain is nominal. However, there is still incentive to use Section 1031 to defer the capital gains tax especially when a substantial gain will be realized.



• The maximum rate on qualified dividend income is now 15%. For people in the 10% and 15% tax bracket, qualified dividend income will be taxed at 5%. The dividends must be from domestic corporations and qualified foreign corporations.

• For 2003 and 2004 there is an increase in the child tax credit for each dependent child under age 17 to $1,000. The credit is phased out starting at adjusted gross income of $75,000 for singles and $110,000 for married taxpayers filing joint returns (joint filers). If Congress does nothing, the tax credit will drop to $600 in 2005.



• For 2003 and 2004, the 15% individual income tax bracket is expanded for joint filers to income of $56,800 (up from $47,450). The standard deduction for joint filers is now $9,500. These adjustments help address the "marriage penalty" issue. The 15% tax bracket for married filing separate filers tops out at taxable income of $28,400 (up from $23,725) and the standard deduction is now $4,750 (up from $3,975).



• The 10% bracket for joint filers is expanded by $2,000 (from $0 to $14,000 of taxable income). Previously, the cap was $12,000. For singles and married taxpayers filing separate returns, the bracket increases $1,000 (from $0 to $7,000 of taxable income).



• Starting January 1, 2003, the individual income tax rates are adjusted as follows:

27.0% goes to 25.0%;
30.0% goes to 28.0%;
35.0% goes to 33.0%; and
38.6% goes to 35.0%.
The 10% and 15% tax brackets remain the same.
The rates will revert from 15% to 39.6% after 2010 without further action by Congress.
The 10% rate would be phased out.


• For alternative minimum tax, the exemption is increased to $58,000 from $49,000 for joint filers.
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All information contained herein is provided as a matter of courtesy to our clients. First American Exchange Company, its officers and agents make no representations as to the completeness and applicability of the information contained herein to each individual taxpayer. As a Qualified Intermediary, First American Exchange Company is precluded from providing tax or legal advice to its clients. Please consult your own independent tax or legal advisor regarding your specific circumstances.