Academic journal article ABA Banking Journal

New Rules Could Spur Rise in "Grow-to-Sell" Banks

Academic journal article ABA Banking Journal

New Rules Could Spur Rise in "Grow-to-Sell" Banks

Article excerpt

Would-be bankers, bankers who have left their employers voluntarily or otherwise, and interested investors and community leaders stand to gain from the Taxpayer Relief Act's capital gains provisions. A number of community bankers interviewed say they expect the improved treatment of capital gains to help encourage more start-up banks.

"This is just one more economic incentive to form new banks," observes Art Johnson, president and CEO of $165 million-assets United Bank of Michigan, Grand Rapids.

The appeal: Making it still more attractive to launch new banks, develop them into winning institutions, and then sell them off--something not unknown even under previous capital gains treatment. The phenomenon of new banks springing up after a market consolidates has been called "reforestation." This potential new pattern could well be considered the financial equivalent of tree farming--raising "trees" for eventual resale to interested planters.

Here is a brief summary of the new tax law's changes regarding capital gains:

The new law cuts the maximum capital gains rate for individuals to 20% (10% for taxpayers in the 15% bracket), effective as of May 7, 1997. (Previously, capital gains for individuals were subject to their regular tax rate, subject to individuals' maximum marginal rate of 28%.) Real estate depreciation recapture will be taxed at a maximum rate of 25%. Assets held between one year and 18 months will be taxed at a maximum rate of 28%, effective July 29, 1997. Starting in 2001, rates will drop to 18% (8% for 15% bracket taxpayers) for assets held for five years. The new law also excludes up to $250,000 ($500,000 for joint returns) of the gain from the sale of a principal home. …

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