Long-Term Capital Gain

What is Long-Term Capital Gain?

Long-term capital gain is the profit realized from the sale of a capital asset, such as stocks, bonds, real estate, or other investments, that has been held for longer than a defined minimum period. This holding period is generally more than one year. Investments sold after this holding period are subject to long-term capital gains tax rates, which are typically lower than short-term capital gains tax rates, thereby offering a tax advantage.

Example

Stock Investment:
- You purchase shares of a company for $10,000.
- After holding the shares for three years, you sell them for $20,000.
- The gain of $10,000 is considered a long-term capital gain and subject to favorable tax rates.
Real Estate:
- Buying a rental property for $300,000.
- Selling the property after 5 years for $450,000.
- The $150,000 profit is treated as a long-term capital gain.

Frequently Asked Questions

What qualifies as a capital asset?

A capital asset encompasses properties such as real estate, stocks, bonds, artwork, and other investments. It essentially includes anything you own for personal or investment purposes.

How long is the holding period for a long-term capital gain?

Generally, the holding period must exceed one year (365 days) to qualify for long-term capital gains treatment.

What are the tax rates for long-term capital gains?

In the United States, the long-term capital gains tax rates can be 0%, 15%, or 20%, depending on your taxable income and filing status.

Are there any assets that do not qualify for long-term capital gains treatment?

Yes, inventory held for sale by a business, depreciable property used in a trade or business, and certain similar assets do not qualify.

How do I report long-term capital gains on my tax return?

These are reported on Schedule D of your Form 1040 and also on Form 8949 if required. They are then transferred to your main tax form for calculation of liability.

Can losses from the sale of investment be applied against long-term capital gains?

Yes, capital losses can be used to offset capital gains on a dollar-for-dollar basis and, if necessary, up to $3,000 of capital loss per year can offset other income.

Capital Asset

A capital asset is any significant piece of property held for personal use or investment, including real estate, stocks, bonds, and art.

Short-Term Capital Gain

A short-term capital gain is profit made from the sale of a capital asset held for one year or less. These gains are taxed at ordinary income tax rates.

Tax Basis

The tax basis is the original value of an asset for tax purposes, used to determine gain or loss upon sale.

Depreciation Recapture

Used to reclaim the tax benefits of depreciation deductions previously taken on an asset, taxed at ordinary income rates upon sale.

Online Resources

References

IRS Tax Code
Investopedia
TurboTax

Suggested Books for Further Studies

Taxes Made Simple by Mike Piper
J.K. Lasser’s Your Income Tax Professional Edition 2023
Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes by Tom Wheelwright
Real Estate Taxation: A Practitioner’s Guide by David F. Windish

Real Estate Basics: Long-Term Capital Gain Fundamentals Quiz

### What is the defined minimum holding period for a long-term capital gain? - [ ] Six months - [ ] One month - [x] More than one year - [ ] Five years > **Explanation:** For an asset to qualify for long-term capital gain treatment, it must be held for more than one year. ### Which tax rates typically apply to long-term capital gains in the U.S.? - [x] 0%, 15%, or 20% - [ ] 25%, 30%, or 35% - [ ] Flat 15% for all income levels - [ ] Variable based on market conditions > **Explanation:** Long-term capital gains are taxed at special rates which are generally 0%, 15%, or 20% depending on taxable income. ### How are long-term capital gains reported on a tax return? - [x] Schedule D of Form 1040 - [ ] Form W-2 - [ ] Schedule C - [ ] Form 1040-ES > **Explanation:** Long-term capital gains are reported on Schedule D of Form 1040 and also may require Form 8949. ### Can a short-term capital gain be taxed at the lower rate applicable to long-term capital gains? - [ ] Yes, depending on deductions - [ ] Only if combined with other long-term gains - [ ] Never - [x] No, short-term capital gains are taxed at ordinary income rates > **Explanation:** Short-term capital gains are taxed at ordinary income tax rates and do not benefit from the lower long-term capital gains rates. ### What can be done with capital losses from investment sales in terms of tax? - [ ] Nothing, they are lost - [x] Offset gains and reduce taxable income - [ ] Move to the next tax year only if under $3,000 - [ ] Only offset gains within retirement accounts > **Explanation:** Capital losses can be used to offset capital gains and up to $3,000 of any remaining losses can reduce other taxable income. ### How long must real estate be held to qualify for long-term capital gains treatment in the U.S.? - [ ] One month - [ ] One year - [x] More than one year - [ ] Five years > **Explanation:** Real estate, like other capital assets, must be held for more than one year to qualify for long-term capital gains treatment. ### Is depreciation recapture treated as long-term capital gain for tax purposes? - [ ] Yes, at the asset sale date - [ ] Only if a special election is made - [x] No, it is taxed at ordinary income rates - [ ] Only for commercial assets > **Explanation:** Depreciation recapture is taxed at ordinary income rates, not the special long-term capital gains rates. ### What is considered a capital asset? - [ ] Inventory held for sale - [ ] Office supplies - [x] Property held for personal use or investment, like real estate or stocks - [ ] Land under an operating business > **Explanation:** Capital assets include properties such as real estate, stocks, bonds, and other investments held for personal use or investment and not inventory or business operations supplies. ### Are there any special loss rules for long-term capital losses? - [ ] Yes, they can only offset up to $1,000 per year - [x] Yes, they can offset other gains on dollar-for-dollar basis and up to $3,000 of regular income annually - [ ] No, losses are only considered for selling-specific period gains - [ ] No, they must be carried over indefinitely > **Explanation:** Long-term capital losses can be used to offset gains dollar for dollar and up to $3,000 of capital loss can offset other income annually. ### What is the IRS resource for information on sales and dispositions of assets? - [ ] Schedule C - [ ] Form W-2 - [x] IRS Publication 544 - [ ] Form 1040 > **Explanation:** IRS Publication 544 provides detailed information regarding sales and other dispositions of assets, including capital gains and losses.