Capital Gains Taxes

A capital gains tax is a tax imposed on the profit earned from the sale of an asset that has increased in value since its acquisition. It is a tax specifically levied on capital gains, which are the positive difference between the purchase price (or cost basis) of an asset and its selling price. The tax is applicable to the difference in value between the purchase and sale price, not the total sale proceeds. The capital gains tax rate depends on the holding period of the asset and the taxpayer’s income level. It is typically categorized into two main types:

Long-Term Capital Gains

These are gains realized from the sale of assets held for more than one year. Long-term capital gains are subject to lower tax rates than short-term gains. The long-term capital gains tax rates are generally more favorable and can vary depending on the taxpayer’s income level.

Short-Term Capital Gains

These are gains realized from the sale of assets held for one year or less. Short-term capital gains are usually taxed at ordinary income tax rates, which are the same rates applied to wages or other ordinary income.  These taxes are not deferable through a 1031 Exchange.

Through a 1031 Exchange, a taxpayer can defer the Long-Term Capital Gain tax on the sale of a real estate property and reinvest the entire gain into a new property.