Capital Gains and Losses

I know some tax advisors are telling their clients to lock in capital losses right now by selling their stocks and real estate that have lost value. I tend to take a contrary opinion of that. I would prefer to take as many capital gains as I can right now and defer my losses for later years. In simple terms an investor will sell one property and purchase another like type of property. It's called a 1031 exchange. The tax laws call this a "like kind exchange". It is in section 1031 of the tax code thus the 1031 reference. This structure allows you to "defer" recognizing a capital gain on the sale of your assets. The normal logic in tax planning is that you want to recognize losses as soon as possible (reduces taxable income) and defer gains as long as possible (gains increase taxable income).

Right now if you are in the 10 or 15% tax bracket your capital gain tax rate on long term gains is 0%. That means you don't pay tax on long term capital gains. Granted not a lot of folks who are serious investors are in the bottom tax brackets, but even the ones who are in the top brackets are only paying 15%. The current rates are set to expire in 2010, when they go to 15% and 20% respectively. The reason I have a contrary view right now on recognizing capital gains is that I fear our current president and democratic congress when it comes to capital gains tax rates.
As recently as 1996 the top rate you paid on capital gains was 29.2%. For those of you who are slow at math, that is almost twice the rate you pay today (1.95 times the current rate). If you go back to 1977, the last time we had really bad economic conditions combined with a government controlled by the Democratic Party, the capital gains rate was 39.9%. I am pretty sure 39.9% is a whole lot higher than 15% and totally blows compared to 0%. If you really want to be scared, go back to 1918 when you had to pay 77% of any capital gain profit to the government. The point is 0%, 15% and 20% are historically very low tax rates on capital gains.
In the best of situations, capital gain rates are going up next year. But realize the $1.7 trillion deficit the government is creating is going to have to get paid off somehow.