Why I Believe Capital Gains Taxes Are Wrong

I'm a middle class investor who has purchased a house for the purpose of making money. I've heard the comments that "tax cuts only benefit the wealthy" and I'm sure you've heard the same comments.

Opponents of tax cuts say the policy only benefits the wealthy at the expense of the middle class. In fact, Senator Obama if elected president has proposed "tax relief for the middle class" and that will include an increase in the capital gains tax.

I believe that if Senator Obama increases the capital gains tax, then he is going to hurt the middle class - especially tradespeople like painters and carpenters. I've thought through this logically based on my real estate purchase and I hope to make future purchases.

BACKGROUND ON MY INVESTMENT
What is the logic behind having a tax on capital gains - especially for a middle-class real estate investor like myself who has a small amount of equity to invest to earn money for both current income and future retirement?

By the way, my personal income in 2007 was quite low and the investment is requiring my hands-on supervision and collaboration with the person who is performing the upgrades. So I'm not a passive investor.

My wife and I have lived in our home in Southern California for 14 years. During that time, the value of our property has tripled. We also purchased a home this February in the western Pennsylvania town of Latrobe near an area in which I grew up. Our purpose for doing so is to renovate the home then place it on the market for re-sale - a "flip" in real estate terms. Why should I have to pay a capital gains tax?

If we sell the home in less than a year, we are subject to a capital gains tax which is currently 15% -- depending on income levels and certain variables. Like all complicated tax codes, there are different capital gains rates. Senator Obama has stated in interviews that if elected president he would raise the tax to nearly 28% where it was under the Clintons. But he has said that 15% is too low. Really? Why?

INVESTMENTS HELP LOCAL ECONOMIES - TAXES HURT
A higher capital gains tax simply increases the cost of doing business and cuts into profitability. For all you politicians out there, this means that a budget-conscious investor may be less likely to pour money into a local economy.

In purchasing our investment home, we studied the area carefully with the help of my sister who is a real estate agent in the greater Latrobe area. We bought a neighborhood eyesore that was unfit for living. We were able to purchase the home at a low price (less than $35,000) and we estimated we would have to put in about $30,000 to fit it up for an attractive resale.

We are using a combination of personal savings and a credit line from our bank (Washington Mutual) to pay for the work.

We are paying 4 men - two of whom recently lost jobs and needed work - in addition to 2 high school students who wanted to pick up a few extra dollars cleaning up the property. We also paid a local electrician and a local craftsman who does siding work. Of course, my sister also took a small commission since she's the agent.

The people doing the work - and my sister -- hope we can sell for a profit because they would like us to repeat the process so they can continue working.

While we're buying supplies from the local Home Depot and Lowes, we are also purchasing supplies from a local hardware store and a local supplier who was able to sell us new siding at a price lower than the big chains. One investment property is allowing further investment in to the local area.

We'll be able to sell the house for a profit but the improvements are not going to push up local real estate prices. In fact, whoever purchases the house will have an improved property in line with local prices and local supply and demand.

I'm paying the city of Latrobe to rent a dumpster, a permit and the local utility company for electricity and gas.

Finally, I also took out two insurance policies to protect against theft of equipment and injury. I did so from a local insurance agent.

I'm able to use some of my own hard-earned savings and a fraction of my equity and invest a small amount. Who is taking the risk for my property? Is it the federal, state or local governments?

HIGH CAPITAL GAINS TAXES CAN DISCOURAGE JOB CREATION
So where is the logic in Mr. Obama's statement that the 15% capital gains tax is too low?

The higher it's raised, the less likely a small investor such as myself will want to pour in wisely invested money for the purpose of turning around a house. Yes, I can do a 1031 exchange if I plan to hold on to the property, etc. In fact, I need to educate myself about real estate tax law.

But the higher a tax, the less money is available from people to invest. I'll even go so far as to say the less money is available from middle class investors who could be squeezed out. And the less income will be available for skilled tradespeople like painters, carpentars, electricians, plumbers and materials suppliers -- the middle class.