The One – Year Tax Rule (Capital Gains)

If you own assets and then sell them, such as an investment property, you need to know about short-term and long-term capital gains. If you’re not paying attention, you could be paying up to 37% of your investment return  to the IRS not including any State taxes. This means that you’d pay $37,000 in JUST federal income taxes if you were to make $100,000 off an investment.
Whether you’ve heard the term or not, you might not know exactly what it means or how to navigate. In fact, most people don’t.
To find out more about capital gains, keep reading and I’ll explain everything you need to know.

What Are Capital Gains?

The United States government will tax any asset that you own, whether it’s a stock, bond, cryptocurrency, gold, silver, real estate, or something else. The government taxes these assets, or capital assets, based on how long you had them in your possession at the time of sale.
However, you do not have to pay a tax on the capital asset until you sell it for a profit. When you sell your asset is a crucial thing you need to consider.
Once you sell the asset, the government taxes your profits at a particular rate based on how much you made and how long you held the asset, thus short-term and long-term capital gains.

Short-Term Capital Gains

Let’s say that I buy a rental property and keep that property for six months. I bought it for $300,000 and sold it for $400,000. This means that I flipped the home for a profit of $100,000.
Because I held the property for one year or less, the government will tax my $100,000 profit based on the short-term capital gains tax rate.
The short-term capital gains tax rate applies to any asset that an investor holds for one year or less. The government taxes these short-term gains as ordinary income.
Since I fall in the highest income bracket, I would have to pay 37% in capital gains tax on my property. Since I sold the property for $100,000, I would have to pay $37,000 in capital gains tax, plus another $12,000 to the State of California.

Long-Term Capital Gains

Now, let’s take the same home from the previous example but keep it for a full year this time. Since I’ve owned the home for a year or longer, the sale of this home would fall under the long-term capital gains tax law.
Long-term capital gains are more favorable for individuals who are in the highest income brackets. The government taxes these assets at a rate of 0%, 15%, or 20% depending on your income tax bracket.
So, the highest tax bracket would spend 20% on long-term capital gains taxes. Using the previous example, I would pay 20% on the $100,000 I made.
Therefore, I would pay $20,000 in long-term capital gains tax rather than the $37,000 I would’ve paid for short-term capital gains tax.

How Much Is the Capital Gains Tax?

The short-term capital gains tax rate is equivalent to the taxes you pay on your regular income. Similarly, the exact amount that you’re going to pay will depend on your filing status and the total amount of profit that you make across your assets.
On the other hand, the long-term capital gains tax offers lower tax rate, with 20% being the highest rate. And, it’s especially useful for those of us in higher income brackets.
To determine how much you have to pay in capital gains tax for the upcoming tax season, you should determine what your filing status is and how much you made in profit across your investments.
Then, compare these findings to the capital gains tax brackets to determine what percentage you owe in capital gains tax.

How Long Should I Keep My Assets?

You should always know how long you’ve been holding an asset. The length of time that you’ve been holding the asset can tell you how much longer you should hold the asset.
For example, let’s say that you’ve been holding onto a property for ten months. You’re thinking about selling soon but aren’t sure whether now is a good time to sell.
Considering the capital gains tax, you should try to hold onto that property for at least two more months and one day before selling. This will maximize the amount that you can make off of the property while paying the least amount in taxes.

How Is the Capital Gains Tax Changing?

Members of the House of Representatives have proposed raising the capital gains tax. Different political figures have suggested doing so over the years, but it seems that 2022 may be the year during which the tax rates change.
House members are looking to raise the top tax rate from 20% to 28.8% in order to help budget a $3.5 trillion deal. This adds a 3.8% tax on net investment income.
Those that fall into the highest tax bracket would include single filers making more than $400,000, head of household filers making $425,000, and married people filing jointly and making $450,000.
Before this plan, politicians planned to raise the rate to 43.4% for those who make more than $1 million in taxes. However, lawmakers have paused this recommendation in favor of the 28.8% deal.
This extra tax income would go towards a social safety net as well as climate change reform. With the proposed increase in capital gains tax, the United States could raise more than $123 billion over the next decade.
In addition to raising the capital gains tax, House members have proposed other tax increases as well. However, these increases will only affect those making over $400,000 per year.
To read more about changing capital gains tax, check out CNBC’s report on personal finance.

Team Up With the Experts

If you’re investing in anything, capital gains tax is a necessary evil. My job is to help you get the most out of your investments by making more money and spending less on things like taxes.
For those interested in investing, don’t let the capital gains tax scare you. There’s still plenty of money for you to make from things like real estate investing.
And, if you team up with me, we can hook you up with a great loan and even better property. Take the first steps towards purchasing an investment property today.
You’ll be able to make more passive income while learning more about the money you’re making.
Our home loan experts can help you map out the best financial plan for your situation. Follow me on Instagram and Facebook @thebriandecker for more expert tips.