Income Tax on Capital Gains

When an individual sells property which is considered a capital asset at a profit after over a year of ownership, he or she will be paying a lower rate of taxes on that profit than on most other types of income. It gets complicated though, since the long term capital gains rate will vary depending on what your regular income tax rate is. Capital assets are also divided into several categories that will affect the rate.

For most assets the long term capital gains rate would be 20% ,if the individual would pay a 39.6 % rate on ordinary income, or 15% if the individual would pay at less than 39.6% on ordinary income but more than 25%. For those in less than a 25% tax bracket, which probably represents a majority of individuals, there is no tax on the long term capital gain. The long term capital gains tax rate however can go up to 25% on property that involves depreciation recapture and 28% on collectibles.

As an estate planning lawyer could also tell you an individual can escape all taxes on capital gains property, if he or she holds it for the rest or their life. Property held at death generally receives a step up in basis to the fair market value at the date of death, and the heir will only incur tax liability, if it further increases in value after that date.