Investment property is a capital asset, and any gain or loss from its sale or trade is generally a capital gain or loss. Capital Gains are taxable for US Federal & State purposes. How the gains are taxed depends on whether the gain is a long-term capital gain (LTCG) or a short-term capital gain (STCG).
LTCG vs. STCG
Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss. If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
Current Capital Gains Tax Rate
The tax rate for long-term capital gains are 0%, 15% or 20%, depending on your taxable income and filing status. Please see the following table for the taxable income rages and tax rates.
Single | Married Filing Jointly | Married Filing Separately | Head of Household | Tax Rate |
$0 – $40,400 | $0 – $80,800 | $0 – $40,400 | $0 – $54,100 | 0% |
$40,401 – $445,850 | $80,801 – $501,600 | $40,401 – $250,800 | $54,101 – $473,750 | 15% |
$445,851 or more | $501,601 or more | $250,801 or more | $473,751 or more | 20% |
Short-term Capital Gains are taxed as ordinary income at graduated rates based on the Federal income tax brackets.
NIIT
The Net Investment Income Tax (NIIT) that went into effect on Jan 1, 2013 imposes a tax of 3.8% on the net investment income of certain individuals. Taxpayers owe the NIIT if they have investment income (such as capital gains from sale of stocks) and also have modified adjusted gross income (MAGI) over the following thresholds:
Filing Status | Threshold * |
---|---|
Married Filing Jointly | $250,000 |
Married Filing Seperately | $125,000 |
Single | $200,000 |
Head of Household (with qualifying person) | $200,000 |
Qualifying Widow(er) with dependent child | $250,000 |
* Please note that these threshold amounts are not indexed for inflation.
State Taxation
It is also important to consider the impact of state taxes on capital gains. While most states tax capital gains and income from work at the same rate, there are some states that tax capital gains at a lower rate.
Let’s consider the following example of a married couple living in Pennsylvania with total taxable wage income of $400,000. Their long-term net capital gain the year is $25,000. Their LTCG tax for the year is $5,468 calculated as follows:
Federal tax: $25,000 @ 15% = $3,750
NIIT: $25,000 @ 3.8% = $950
PA State tax: $25,000 @ 3.07% = $768
It is important to consult a trusted tax advisor to ensure your capital gains are reported correctly on your tax returns and you pay the appropriate amount of tax to the right jurisdictions.