Do I have to pay taxes on short-term capital gains? The answer is, “Yes, you do.” The question should probably be rephrased as, “At what tax rate?” Well, it’s my understanding that if you have short-term capital gains, you have to pay at your ordinary tax rate. Also, what do you mean by “capital gains”? That usually has to do with whenever you sell property under the Code Section 1031 property, which is property that’s held for business or investment purposes.
If you only hold it for a short period of time, then it’s considered a short-term capital gain and you can offset your short-term capital gain against your short-term capital losses (hopefully you don’t have any of those.) But you can see how that could work because if you were buying and selling houses, you buy a house, you fix it up, you turn around and sell it in a matter of three or four months and you make money on it. That would be considered a short-term capital gain and taxable at your ordinary rate.
Now, short-term capital gain versus a long-term capital gain: I believe the holding period is for one year. So if you hold your property for long enough to qualify for long-term capital gains, long-term capital gains are taxed at a rate of 15 percent. Now, that Internal Revenue Code provision may be being phased out this year. I think that was under the Bush tax cuts, but I could stand to be corrected. These are more something that you could talk to your accountant about. But if you hold investment property for more than a year, then when you sell it you can take advantage of the long-term capital gains.
Now, whenever you sell your home, however, if you lose money on it no matter how long you’ve had it, you don’t get to take any loss on the sale of your house since you don’t hold that for the sale of business or it’s not an investment; whereas if you sell your home and you make a gain on it, you can exempt gains up to $250,000.00 if you lived in the house two out of the past five years. Let’s say that you didn’t live there for that period of time and you had a gain. Well, then you didn’t hold it for more than a year and sold it and had a gain. Then it would be a short-term capital gain, which you’d have to pay ordinary income for.
So if you have any questions about buying and selling your property and short-term capital gains, give me a call at (727) 847-2288. Thank you.