Capital asset deemed-sale election available until Oct. 15, 2002.

• Author: Whitlock, Brian T.

The Taxpayer Relief Act of 1997 (TRA '97) created a new category of five-year long-term capital gains, effective Jan. 1, 2001. The new "really long-term capital-gain" (RLTCG) rate creates a postmortem tax planning opportunity for estates of individuals dying after that date and before Oct. 15, 2002.

Background

Under the TRA '97, 8% and 18% RLTCG rates are available for the disposition of certain capital-gain assets. Taxpayers in a 15% or lower bracket can use an 8% RLTCG rate for capital gains on assets they hold for at least five years. (The regular long-term capital-gain (LTCG) rate for such taxpayers is 10%.) For calendar-year 2001, Form 1099 listed the five-year portion of capital-gain distributions made from many mutual funds as a separate item.

Taxpayers in a bracket above 15% would be eligible for an 18% RLTCG rate for gains on capital assets they hold for at least five years, if acquired after 2000. Thus, to be eligible, a taxpayer must hold such assets until after 2005 before disposing of them. (The regular LTCG rate for such taxpayers is 20%.)

Deemed-Sale Election

Under TRA '97 Section 311, higher-bracket taxpayers could make a deemed-sale election to treat one or more of the capital assets they acquired before 2001 (and thus ineligible for the 18% RLTCG rate) as if acquired on Jan. 1, 2001. A taxpayer so electing will recognize any gain on the asset(s) as of Jan. 1,2001 and pay tax. The election cannot be used to recognize losses. It can be made by individuals and flowthrough entities (e.g., partnerships, S corporations, limited liability companies (LLCs), trusts, etc.).

The taxpayer makes the election with the return for the period that includes Jan. 1, 2001, either on an original or amended return filed by the extended due date (i.e., September 15 for calendar-year S corporations; October 15 for individuals and calendar-year partnerships, LLCs and trusts). Once made, the election is irrevocable.

Why Make an Election?

This "mark-to-market" type election creates interesting planning opportunities. Most taxpayers will use an election when the tax to be paid as a result of making the election and qualifying for the 18% RLTCG rate is negligible. Some taxpayers will also make the election as part...