Possible capital gains tax increase on the horizon?

Recently, the Wall Street Journal released an article discussing a recent phenomena we've seen in the exchange business. The article, written by Dale Arden is titled Property Investors Fear Gains-Tax Rise, Shift 1031 Strategy. It discussed the idea that real estate investors are not using 1031 exchanges as a strategy in light of the possibility that a new administration will raise capital gains tax rates. Instead, they are taking advantage of, what is perceived as the lowest capital gains tax rate, the 15% long-term capital gains tax.

We discussed this a couple months back in an entry titled, AMT, Capital Gains and the Time Value of Money. The answer to the question really comes down to whether it is financially better to pay a 15% tax rate or pay a 20% or 25% rate when the property is sold some years out. Central to the analysis of this is the assumptions made. When will the replacement property be sold and at what level of appreciation? The longer the hold period and the greater the appreciation, the more likelihood that it may still make sense to defer the gain and pay the tax later. That, of course, assumes there is a capital gains tax that is higher at the date you defer than today. After all, they could go up only to be reduced at some later date before you eventually cash out and pay the tax. Betting on politics...now that is a tricky game!