Saturday, August 2, 2008

Political Wordplay: Taxing Income, Capital Gains Is Far Different From Taxing Assets

Earlier, I wrote on how Sen. Barack Obama -- presumptive democrat nominee for the U.S. presidency -- has proposed an increase in the capital gains tax. Also increases in income tax.

This post today is not about politics, and my choice or where I lean, but more about the politics of politics, and where big money donors come from -- and more importantly, what motivates them (and to the contrary, what scares the crap out of them).

I read a piece earlier this week that asked why some of the most wealthy people in this nation are writing big donation checks to Sen. Obama's campaign, especially if his proposals are going to affect them the most.

Therein lies the fallacy.

His proposals will not affect the most wealthy, even though his campaign is pushing that thought. The most wealthy in this nation hold investment real estate. And they use 1031 tax-deferred exchanges to avoid capital gains. You cannot do that with stocks and bonds, nor jewelry, nor precious metals, etc. So the proposals to increase taxes on capital gains and increase income taxes means little, even though it sounds powerful to people who don't understand the tax system, and have a chip on their shoulder when it comes to people who are more well off.

Now, if the proposal from ANY candidate were to tax "assets," . . . . those donations would dry up and look like the desert in the U.S. southwest. Because people who use real estate to build wealth are working to avoid paying income taxes. And anyone can do it. You buy a property, let it appreciate for a few years, and continue to pay down the mortgage. As your equity grows, you can refinance the property, essentially making a loan to yourself that you never have to pay back. It is not taxable, because it is equity from your property -- not income. And you don't have to pay it back because your tenants make the payments for you with their monthly checks they send.

Most Americans rely on their income. But few jump into investment real estate -- despite the ease of entry -- because of irrational fear or belief by the media that the real estate market is upside down. The residential side (for a home in which to live) is hurting. But the investment side is humming right along.

Food for thought.

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