Blog

The Capital Gains Tax Primer You Have Been Looking For

Key Takeaways

  • Capital gains tax is essentially a tax levied on the profits made from an asset’s sale.
  • Capital gains are taxed at two different rates: long-term and short-term.
  • A 1031 exchange awards qualifying homeowners the ability to postpone paying a significant amount of taxes in the event they sell said property for a gain.

As its name suggests, the capital gains tax is a special tax levied in the direction of those that sell an asset for more than they bought it for. It is worth noting, however, that the tax is more nuanced than that; it has a lot of “moving parts,” not the least of which can dramatically impact the way a person chooses to invest. Dealing with capital gains, for that matter, can actually influence deals unlike just about anything else, which begs the question: What does the capital gains tax mean for entrepreneurs in the real estate industry? One thing is for certain: The more you know, the better off you’ll be.

Whether you are currently confronted with capital gains issues, or you simply want to learn more about the tax itself, I urge you continue reading. The following should serve you well as an introductory capital gains tax guide.

What Is Capital Gains Tax?

The name says it all: capital gains tax is essentially a tax levied on capital gains. And for those of you less familiar with the concept of capital gains, they are the profits realized when an investor sells their asset for more than the original purchase price.

The powers that be at the Internal Revenue Service (I.R.S.) will tax investors on the profits they make from a sale (the sales price – the original purchase price). To be clear, capital gains are only realized when an asset is sold for more than it is purchased. Therefore, you may not be taxed on capital gains if you sell an asset for less than you bought it for.

Capital gains taxes will be applied to anyone who sells an asset for a profit, but I digress. There are exceptions to the rule, which I will get into later. For now, it’s safe to assume that if you sell a property for more than you bought it for, the I.R.S. will levy a capital gains tax in your direction for a percentage of the amount you profited.


[ Selling a house in the next 12 months? Don’t do it without using these 21 proven tricks to get any house sold FAST ]


Long-term capital gains

What Is Capital Gains Tax Rates?

Capital gains levied on the profits from home sales are taxed at two specific rates: long-term and short-term.

Long-term capital gains rates apply to assets that were held for more than a year. That is to say, a year or more has passed between the original purchase and the eventual sale. Thanks, in large part, to the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), “U.S. taxpayers in the two lowest tax brackets (which account for about two-thirds of all individual tax returns) pay no capital gains taxes,” says Investopedia. However, those taxpayers that don’t fall into the two lowest tax brackets aren’t awarded the same luxury. In fact, there are two rates long-term capital gains will be levied at:

  • Those that reside in the 25 percent-and-higher tax brackets are expected to pay a 15 percent tax rate on their capital gains.
  • Those that reside in the top 39.6 percent tax bracket are expected to pay a 20 percent tax rate on their capital gains.
  • There are certain exceptions (depreciated real estate and collectables) that will have taxpayers pay upwards of 25 to 28 percent on their capital gains.

Short-term capital gains, on the other hand, are a bit easier to diagnose. In fact, “the capital gains tax rate for short-term capital gains (on assets held under a year) is usually the same as the tax rate on earned income or other types of ordinary income,” according to Investopedia.

Capital Gains Tax Calculator

Calculating the amount you could be taxed on your capital gains is relatively straightforward. However, the ramifications of an improper calculation are particularly dire, and better left to a professional. That said, do not calculate your own capital gains. Instead consult a tax professional well-versed in the real estate industry to ensure your calculations are correct.

If, however, you are interested in an estimate (not to be confused with an exact amount), I recommend using a capital gains tax calculator, like the one found on NerdWallet.

Long Term Capital Gains Tax Vs. Short Term Capital Gains Tax

Generally speaking, the long term capital gains tax vs. the short term capital gains tax debate isn’t much of a debate at all. When all is said and done, long term capital gains are almost always better for taxpayers, as the levy is significantly less for asset that have been held for more than a year. For a better idea of the differences between long and short-term capital gains rates, continue on to the next section.

Capital gains tax rate

How Are Capital Gains Taxed?

Again, capital gains tax rates will depend on two things: how long you held the asset and how much money you make. A complete breakdown of the capital gains tax rates can be found below.

Long-term capital gains tax rates:

  • If you make up to $9,325 a year and sell an asset for a profit, your capital gains won’t be taxed.
  • If you make between $9,326 and $37,950 a year and sell an asset for a profit, your capital gains won’t be taxed.
  • If you make between $37,951 and $91,900 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 15 percent.
  • If you make between $91,901 and $191,650 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 15 percent.
  • If you make between $191,651 and $416,700 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 15 percent.
  • If you make between $416,701 and $418,400 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 15 percent.
  • If you make $418,401 or more a year and sell an asset for a profit, your capital gains will be taxed at a rate of 20 percent.

Short-term capital gains tax rates:

  • If you make up to $9,325 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 10 percent.
  • If you make between $9,326 and $37,950 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 15 percent.
  • If you make between $37,951 and $91,900 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 25 percent.
  • If you make between $91,901 and $191,650 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 28 percent.
  • If you make between $191,651 and $416,700 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 33 percent.
  • If you make between $416,701 and $418,400 a year and sell an asset for a profit, your capital gains will be taxed at a rate of 35 percent.
  • If you make $418,401 or more a year and sell an asset for a profit, your capital gains will be taxed at a rate of 39.6 percent.

How To Report Capital Gains And Losses

According to the I.R.S., “Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return.”

How To Avoid Capital Gains Tax

As I already alluded to, the easiest way to avoid paying capital gains is to simply realize a long-term capital gain while simultaneously making $37,950 or less a year. That said, not everyone qualifies under such limited criteria. Fortunately, there’s another way: the 1031 exchange.

Otherwise referred to by the Internal Revenue Service (I.R.S.) as Section 1031 under the Internal Revenue Code, a 1031 exchange awards qualifying homeowners the ability to postpone paying a significant amount of taxes in the event they sell said property for a gain. Or, as the I.R.S. so eloquently puts it, “Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.”

Have you ever found yourself wondering what capital gains are? Better yet, are you wondering if you’ll have to pay a capital gains tax if you sell? Whether you wanted to learn more about capital gains or you simply needed a refresher, I hope this primer helped you out. If there’s anything else you’d like to add, please feel free to leave a comment below.

*The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no representations, warranties, or guarantees, either express or implied, as to whether the information presented is accurate, reliable, or current. Any reliance on this information is at your own risk. All information presented should be independently verified. FortuneBuilders Inc. assumes no liability for any damages whatsoever, including any direct, indirect, punitive, exemplary, incidental, special, or consequential damages arising out of or in any way connected with your use of the information presented.

🔒 Your information is secure and never shared. By subscribing, you agree to receive blog updates and relevant offers by email. You can unsubscribe at any time.