Long Term Real Estate Capital Gains – Rules and Rates!

Real Estate Versus Other Assets

August 27, 2004
By Niles Brohey

If you own a capital asset such as shares, a business, or real estate and then you sell it you will be taxed on the gain you make from this transaction. This tax is called capital gains tax. On most assets the rate of capital gains tax you pay will primarily depend on how long you have owned the asset. This is called the holding term.

However on some special assets, such as real estate, the holding term makes no difference. Capital gains on real estate, unlike other assets, are taxed at a flat rate. This rate is not determined or influenced by your income or how long you have owned the asset as it is with capital gains on shares for example. This is true of all real estate with only two exceptions – if the real estate is your current home and if the real estate was being rented out.

The rate of capital gains tax levied on gains from real estate transactions is much higher than the rate of tax on other assets. It can be as much as 20% higher, which amount to a huge large amount of payable tax when you consider the large gains to made on real estate. As mentioned above this special flat rate is charged because real estate is treated as a special kind of asset in capital gains law. Again this is not true of rental property or a property you lived in for 2 of the past 5 years.

The tax rate on 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%. Although the length of time an asset has been held makes a difference when considering your tax situation when you are selling standard assets, it makes very little difference when selling real estate since real estate is subject to 25% tax regardless of the holding term or income bracket of the holder.

The main point to note is that real estate is taxed heavily and its tax status is such as to allow very little room for reducing your capital gains tax rate.