Long-term capital gains, defined by assets held for more than one year, are taxed at a lower rate than short-term gains. Under President George W. Bush, this rate was reduced in 2003 to 15% for individuals outside of the lowest two income tax brackets. These reduced tax rates are effective through 2010. If they are not extended before the end of this year (and the current administration has shown no desire to extend), they will expire and revert to the rates in effect before 2003, which were generally 20%.
What does this mean to the senior housing industry? If the capital gains tax rates are increased as is expected in 2011, we will see an uptick in transaction activity in 2010 as current owners attempt to maximize their after-tax return on investment. Of course, much of the transaction activity will depend on lending community, but I believe that we will see current owners push their transactions through to close by the end of this year. This will cause more quality inventory to come on the market.
How does this impact the potential sale of my facility? As an example, if an owner has a cost basis of $3 million and will be selling his/her facility for $5 million after fees, the owner will be on the hook for $2 million in capital gains. If the 2010 tax rate continues to be 15%, the owner will be obligated to pay $300,000 in taxes if the transaction is completed in 2010. If the 2011 tax rate increases to 20%, the owner will have to pay an additional $100,000 in taxes if the transaction is completed after December 31, 2010.
Since typical senior housing transactions can take 6-8 months or longer to close, now is a great time to explore selling your senior housing facility. Senior Living Investment Brokerage, Inc. had a record year in 2009 in an uncertain economy. SLIBCO provides non-binding marketing proposals, whether you’re interested in selling soon or are just curious of your facility’s value.
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