What is the capital gains tax rate for assets held in a family limited partnership?
Understand the applicable capital gains tax rate for assets held within a family limited partnership structure.
The capital gains tax rate for assets held in a family limited partnership (FLP) will generally depend on the specific circumstances of the partnership and the individuals involved. Family limited partnerships are a common estate planning tool used to transfer wealth within a family, and the tax treatment can be influenced by various factors.
In the United States, capital gains tax rates can vary based on the type of asset, the holding period, and the individual's overall income, the long-term capital gains tax rates for individuals were generally lower than short-term rates. The long-term capital gains tax rates were as follows:
- 0% for individuals in the lowest tax bracket.
- 15% for individuals in the middle-income tax brackets.
- 20% for individuals in the highest tax bracket.
However, the Net Investment Income Tax (NIIT) of 3.8% may apply to some or all of the net investment income of high-income individuals, making their effective capital gains tax rate higher.
The specific tax implications of an FLP will depend on factors like the nature of the assets held within the partnership, the ownership structure, the transfer of assets, and the income of the family members involved. Additionally, tax laws and rates may change over time, so it's essential to consult with a qualified tax professional or attorney who can provide you with up-to-date guidance and tailor the advice to your specific situation.
Tax laws can be complex, and it's crucial to obtain professional advice to ensure compliance with current regulations and to optimize your tax situation when dealing with family limited partnerships or any estate planning strategies.
Capital Gains Tax Rate on Family Limited Partnership Assets.
In the United States, the capital gains tax rate on FLP assets depends on the holding period of the assets and the individual partner's tax bracket.
Short-term capital gains are taxed at the partner's ordinary income tax rate, which ranges from 10% to 37%. This is the same tax rate that applies to wages, salaries, and other forms of earned income.
Long-term capital gains are taxed at a lower rate, which is 0%, 15%, or 20%. The specific rate that applies depends on the partner's income.
For individuals with taxable income of $0 to $40,400, long-term capital gains are taxed at 0%.
For individuals with taxable income of $40,401 to $441,450, long-term capital gains are taxed at 15%.
For individuals with taxable income of $441,451 or more, long-term capital gains are taxed at 20%.
In addition to the capital gains tax rate, there is also a 3.8% net investment income tax (NIIT) that applies to certain taxpayers with high incomes. The NIIT is applied to the lesser of the following:
- The partner's net investment income (e.g., interest, dividends, and capital gains)
- The partner's modified adjusted gross income (AGI) in excess of $200,000 for single filers or $250,000 for married filing jointly
FLPs can be used to minimize capital gains taxes in a number of ways. For example, by transferring appreciated assets to an FLP, the individual partner can defer the recognition of capital gains until the assets are sold by the FLP. Additionally, the FLP can be structured to allocate capital gains to partners in lower tax brackets.
Here are some specific examples of how FLPs can be used to minimize capital gains taxes:
- A parent can transfer appreciated assets to an FLP owned by their children. The children will then be taxed on the capital gains when the assets are sold, which may be at a lower rate than the parent's tax rate.
- An FLP can be used to transfer assets to a trust. The trust can then be used to hold the assets for a long period of time, which will qualify the capital gains for the lower long-term capital gains tax rate.
- An FLP can be used to allocate capital gains to partners in lower tax brackets. For example, a partner with a high income can transfer appreciated assets to an FLP, and then the FLP can allocate the capital gains to partners with lower incomes.