Short Term And Long Term Capital Gains Tax Rates

The key to understanding short term capital gains versus long tern capital gains is to first comprehend what is defined as the long versus the short term and hence both are taxed differently depending on what type your investment is considered to be. By legal definition the short term refers to any assets that have a holding (held in your possession) period is one year or less. These short-term capital gains are normally taxed at regular or ordinary income tax rates. On the other hand the long term holding period is defined as more than one year, even if it is just one year and a day. Longer term capital gains are not taxed at ordinary tax rates, instead the gains are discounted. Long term tax rates fall between 5% and 15%; this is determined by the individuals’ marginal tax bracket. The tricky side to this is how people view the holding period.

The holding period is based on the date of acquisition until the date of liquidation of the asset. Many investors attempt to extend the holding date to be charged at discounted rates. This proves a major problem too many short term investors as capital gains taxes will always prove a problem. Let us examine a very profitable practice of flipping properties. This is done quite easily; one purchases a property, repairs it and sells it for a marginal profit. Now if all calculations are not done properly then capital gains taxes can eat away at your profit margins. A truly common mistake. Let us assume Marge is a real estate flipper she buys a property and takes six months to rehabilitate it. A real estate agent takes two months to find a buyer and it takes another two months to complete the closing. If Marge made a profit upon sale that profit is considered capital gains for the short term and will be taxed at rates of almost 35% while if she kept the property for just 1 year and a day she would pay capital gains taxes at a rate of just 15%. This is a big chunk of anybody’s profits as this can severely affect bottom line earnings.

There is however a loophole but this is geared towards true investors who can cream several thousand of dollars from daily transactions in like kind. This uses the premise that the sale of an asset must be used to procure an asset of the same kind. So if you sold a car the profit must be used to purchase another car and so forth. A very nifty deal however this again is for major players and not those that exist on profits. If you can add your personal costs to construction costs then you will not have an issue in rolling over the revenue in short order deferring your capital gains taxes to a later date.
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