What a Difference a Day Makes - Capital Gain Holdings

Many of you may know that there is a substantial spread between the tax rates for the sale of investments that are considered short-term capital gains versus long-term capital gains.

The expression "what a difference a day makes" is right on target when it comes to selling appreciated investments. One less day of ownership can be the difference between having your gain taxed at 35% instead of at the preferential 15% (or possibly 5%) capital gain tax rate(s).

Short term gains are taxed at ordinary income tax rates which can be as high as 35%. Long term capital gains qualify for either a 5% or 15% rate. This article will help to outline the holding period rules you must satisfy in order to get the preferential tax rate treatment.

The tax term involved that dictates what rate will be used is called the holding period. This is the minimum period of time you must hold an investment to get the favorable long-term capital gain rates.

Here's an introduction to some of the more common holding period rules. It will help keep you from making a tax mistake that you won't be able to undo once your trade is made.

  • To yield "long term" capital gain tax treatment, an asset must be held for more than one year. In other words, for at least a year and a day. The holding period begins on the day after you buy an asset, and ends on the day you sell it.
  • “Short term” rates would apply to anything that is held for a year or less.

Special holding periods. There are a number of special holding periods that must be met for certain types of gains to be favorably taxed. Here are a few of them:

  • If you inherit a capital asset, you are automatically treated as having held it for more than one year. Thus, for example, if you inherit a vacation home and sell it six months later at a gain this would be taxed at the long-term capital gain rates.
  • Adding on someone else's holding period. There are instances where your holding period includes someone else's. For example, if someone gives you stock, your holding period includes the donor's holding period. Similarly, if you acquire property from your spouse (or your ex-spouse, in the case of a divorce), your holding period includes your spouse's (or ex-spouse's) holding period.
  • Adding on another property's holding period. When you defer gain on property by exchanging it for other like-kind property, the holding period of the new property includes the holding period for the old property. Thus, for example, if you swap an apartment building for an office building, your holding period for the office building includes the period of time you held the apartment building.

Keep in mind that these are the more common types of holding period rules. We will be happy to explain how the rules apply to your personal situation, and help assure that you'll pay the lowest possible tax when you sell any investment asset.

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