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The capital gain tax rates for individuals, estates, and trusts are much lower than corporate rates. The long-term capital gain tax rates following the Ten/ Fifteen/ Twenty-five formula:
Ten Percent Rate
Individuals who are in the 15% income tax bracket receive the lower capital gain tax rate of 10% on the sale of any real estate investment. These individuals are not necessarily low-income consumers; rather they are usually middle-class investors with good accountants.
Fifteen Percent Rate
The maximum capital gain tax rate for all other individuals, estates and trusts is 15% - except for the accumulated depreciation portion of capital gain.
Twenty-five Percent "Accumulated Depreciation" Rate
A sizable portion of most real estate capital gains are often due to accumulated depreciation that had been subtracted from the basis. This accumulated depreciation helped the investor to lower his income taxes. Now, the IRS wants some of that back and assesses a 25% tax rate on the recaptured depreciation portion of the capital gain. Although the investor still comes out ahead.
New Five-year Rate
Congress gave an additional bonus for individual investors who purchase the property after December 31, 2000 and hold it for at least 5-years. The 10% rate drops to 8%, while the 15% rate drops to 13%. These new capital gain rates will be claimed starting with sales in 2006.
Example Gain Rate _ Tax
*Original Cost $500,000
*Less Accumulated -$175,000
Depreciation
*Adjusted Basis =$325,000
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*Resale Price $800,000
*Less Adjusted Basis -$325,000
*Total Capital Gain =$475,000
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*Accumulated Depreciation -$175,000 25% $43,750
*Remaining Capital Gain $300,000 15% $45,000
*Total taxes Due for Sale $88,750
This is a simplified explanation and example of how capital gains are taxed for individuals. Real estate investors must rely on experienced, professional help when preparing their tax returns.
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