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Navigating capital gains
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April 9, 1998: 3:28 p.m. ET
Your rate depends on how long you owned an asset and when you sold it
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NEW YORK (CNNfn) - Making money was never such a pain in the neck.
Cuts in capital gains rates are so mind-numbingly complex that taxpayers will be even more susceptible to goofs on their income tax statements due April 15, financial advisers warn.
"It's a nightmare," said Ed Slott, a certified public accountant and author of "Your Tax Questions Answered."
The problem is there are different rates that apply on your 1997 tax bill, depending on when you sold an asset.
"Everything is date-sensitive now," Slott said.
Consider the different scenarios:
 The biggest relief you'll get is for gains on assets you've owned more than 18 months that you sold after July 28, 1997. The maximum rate is dropping from 28 percent to 20 percent for people in the three highest income brackets. People in the 15 percent income bracket will pay 10 percent.
 Gains on assets you've held for a year or less are still taxed at regular income rates of 15 percent to 39.6 percent.
 Gains on assets you've owned for a year to 18 months that you sold after July 28, 1997, are taxed at the old capital gains rates. That's 15 percent for people in the 15 percent income bracket and 28 percent for people in the three higher brackets.
 Because of a goof in Congress last year, you can use the new capital gains rates on assets you've owned longer than a year that you sold between May 7 and July 28, 1997.
 You'll also pay less taxes on depreciation deductions you've taken on residential property, said Gerard Papetti, a certified public accountant with U.S. Financial Services in Fairfield, N.J. Before, you paid ordinary income rates of up to 39.6 percent on depreciation deductions when you sold a home. Under the new law, you pay a maximum of 25 percent.
 But the old capital gains rate of 28 percent still applies to collectibles such as artwork, gems, precious metals or stamps.
What do the changes mean for your tax return?
Elda Di Re, a partner at Ernst & Young, said mutual fund investors need to be particularly diligent this year.
Fund companies are reporting the different capital gains rates in different ways on the 1099s: sometimes on a separate form, sometimes in a footnote, Di Re said.
"It could even be on something that looks like a flyer or an advertiser," Di Re said.
Some people may even mistakenly add up the 28 percent and the 20 percent rates on the mutual fund statements, thinking they are responsible for 48 percent.
Filling out Schedule D -- the form used for gains and losses on asset sales - also will be tricky. For stock and asset transactions, you'll mark down total gains on Line 8F, and gains at the 28 percent rate on Line 8G, Papetti said. The same is true for mutual fund distributions: You'll mark total gains on Line 13F, and gains at the 28 percent rate on Line 13G.
Another possible pitfall is if you get income in installments, Slott said. For example, if you sold your house and you agreed to hold the note, you'd be getting payments throughout the year.
That means the payments before May 7; between May 7 and July 28; and after July 28 will get different tax treatment, he said.
The same would apply if you sold a business or other property on installments, Di Re said.
There are other changes in the capital gains regulations that won't take effect until the year 2000 or later.
Beginning in 2002, people in the 15 percent tax bracket will pay 8 percent on assets sold that they've owned longer than five years.
In 2006, people in the other tax brackets will pay 18 percent on assets sold that they've held longer than five years and bought after 2000.
Don't expect much with the 2 percent reduction, Slott said.
"It isn't a killer deal to drop 2 percent," Slott said. "Only if it's a huge holding. But the bigger the holding, the more market risk there is. I wouldn't bank on that."
Di Re cautioned against counting on the reduction, since Congress could change the law.
"I look at(tax law changes) as 'Believe it when you see it, " Di Re said. "It's easy to change a law that hasn't taken effect."
-- by staff writer Martine Costello
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I.R.S.
Ernst & Young
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