Capital Gains Tax On Property – What You Need To Know!

What Rate Will I Pay?

August 16, 2004
By Niles Brohey

Capital gains tax on properties work exactly like capital gains taxes on investment real estate with two exceptions – When the property had been rented out and when the property was your primary place of residence for 2 of the last 5 years.

Capital gains tax on property is higher than the corresponding tax on other assets, in some cases it is as much as 20% higher. This is because investment real estate is treated as a special kind of asset in capital gains law and has a special rate applied to it. This is not true of rental property or a property you lived in for 2 of the past 5 years.

The tax rate on investment real estate is a flat 25%, this tax is high compared to taxes on other assets such as shares which are applied at between 5% and 15%. Unfortunately there is no real way around this high tax rate, it comes as part of the territory when trading in real estate.

Capital gains tax on rental property is not applied at 25%, instead part of the gain is charged at your income tax rate and part is charged at between 5% and 15%. The proportion of each is determined by how much value the property has depreciated in value since you originally purchased it.

The capital gains tax on a property which was your primary residence for at least 2 of the previous 5 years is offset to a great degree by a tax exemption rule. If a house qualifies as your primary residence under the conditions outlined above you are entitled to $250,000 of your capital gains on its sale being tax free for a single person, and $500,000 for a married person.