Rules for Capital Gains Tax on Property

by Patrick Gleeson, Ph. D., Registered Investment Adv ; Updated July 27, 2017

What is a Capital Gains Tax?

A capital gains tax is a tax on profits from the sale of a capital asset. The basis of the U.S. tax system is that any activity that produces a financial gain -- whether labor, financial speculation, material goods production or the profitable sale of any asset -- is taxed. The U.S. capital gains tax rate rose as high as 40 percent in the 1970s and reached an historic low of 15 percent in the first decade of the 21st Century. What has remained consistent since 1921 is that gains on the sale of capital assets -- the category includes property -- have been taxed at a lower rate than other financial gains.

The Rationale for a Capital Gains Tax

The social and economic value of the capital gains tax has long been disputed. A 2015 "Wall Street Journal" article presents both views succinctly. Those arguing in favor of a lower capital gains tax rate point out three important factors:

• An asset held over time increases in value in part because of price inflation. If price inflation doubles during a given time period, the asset will normally cost twice as much at the end of the time period than it cost at the beginning. But there's been no real gain, because everything else also costs twice as much.

• The money used to buy a capital asset has already been taxed once when it was earned. Taxing it again when the asset purchased with that money is sold is essentially double taxation.

• A lower capital gains tax encourages investors to take risks. Taking risks invigorates the economy and thereby benefits everyone.

Those who oppose these arguments contend that capitol gains should be taxed like any other form of income. Failing to do this rewards the wealthiest Americans, critics say, and allows the wealthy to pay lower tax rates than Americans in much lower income brackets.

Capital Gains Rules on Property Sales in 2015

The profitable sale of any property -- stocks, bonds, real estate, artworks or anything else -- triggers one of two capital gains tax rates: the short- term capital gains rate for assets held for one year or less, and the long-term rate for assets held for more than a year.

Short-Term Capital Gains Rates

The tax rates for short-term capital gains are essentially the same as the 2015 tax rates on ordinary income. They begin at 10 percent for single persons earning $9,225 ($18,450 for couples filing jointly) and then climb in seven different brackets to 39.6 percent for earnings of $413,200 or more. Couples are taxed at increasingly higher rates than single taxpayers as their incomes increase and are taxed at the highest bracket with joint incomes of $464, 850.

Long-Term Capital Gains Rates

Single taxpayers who earned less than $37,450 on long-term capital gains in 2014 paid no taxes. The rate was 15 percent for capital gains between $37,450 and $413,200 and 20 percent on gains of more than $413,200. Couples filing jointly pay no taxes on long-term capital gains of $74,900 or less, 15 percent for capital gains between $74,900 and $464,850, and 20 percent on gains of more than $464,850

Taxpayer Beware

Although the basic capital gains tax rate structure is relatively simple -- three brackets for all taxpayers -- tax advisors at Bankrate and elsewhere advise taxpayers in higher brackets to proceed with caution. From 2013 forward, a separate 3.8 percent surtax on some, not all, capital gains, effectively adds a fourth capital gains tax bracket for high earners with certain investment gains. For example, although gains on the sale of residential property are excluded from the surtax, gains on the sale of certain commercial real estate may not be. It depends on the extent of the gain and its relation to other income. High income bracket investors should consult their tax advisors for guidance.

About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.