Capital gains tax on an investment property is a tax levied on the profit (capital gain) that an individual or entity realizes when they sell an investment property, such as real estate, stocks, or other assets, at a price higher than their original purchase price. Capital gains are typically categorized into two types: short-term and long-term, each with its own tax rates and rules.
Here's a breakdown of how capital gains tax on investment property works in the United States:
1. Short-Term Capital Gains: These are gains realized from the sale of an investment property that was held for one year or less. Short-term capital gains are typically taxed as ordinary income, which means they are subject to the individual's applicable income tax rates. These rates can vary depending on the individual's total income and filing status.
2. Long-Term Capital Gains: These are gains realized from the sale of an investment property that was held for more than one year. Long-term capital gains are generally subject to lower tax rates than short-term gains. As of my last knowledge update in September 2021, the long-term capital gains tax rates were as follows for most taxpayers:
- 0% for taxpayers in the 10% or 12% ordinary income tax brackets.
- 15% for taxpayers in the 22%, 24%, 32%, and 35% ordinary income tax brackets.
- 20% for taxpayers in the 37% ordinary income tax bracket.
Additionally, there may be an additional 3.8% Net Investment Income Tax (NIIT) imposed on net investment income, including capital gains, for certain high-income individuals.
3. Depreciation Recapture: If you have claimed depreciation deductions on the investment property during your ownership, a portion of your gain may be subject to depreciation recapture at a maximum tax rate of 25%.
4. 1031 Exchange: As mentioned in a previous response, a 1031 exchange allows investors to defer paying capital gains taxes on the profit from the sale of an investment property if they reinvest the proceeds in a like-kind property.
5. State Capital Gains Taxes: In addition to federal capital gains taxes, some states also impose their own capital gains taxes, which can vary widely in terms of rates and rules. It's essential to consider both federal and state tax implications when selling investment property.
Please note that tax laws can change over time, and it's crucial to consult with a tax professional or financial advisor to understand the current tax rules and implications specific to your situation. They can help you plan your investment property transactions in a tax-efficient manner and provide guidance on available deductions and exemptions.
