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Capital Gains
The profit realized from selling a property for more than its original purchase price.
Definition
Capital gains are the profits earned when a property is sold for more than its adjusted cost basis (original purchase price plus improvements minus accumulated depreciation). Short-term capital gains (properties held less than one year) are taxed at ordinary income rates, which can be as high as 37%. Long-term capital gains (held over one year) receive preferential tax treatment, with rates of 0%, 15%, or 20% depending on income level. An additional 3.8% Net Investment Income Tax may apply for high earners. Investors can defer capital gains taxes through 1031 exchanges or reduce their tax basis through proper depreciation strategies.
Related Terms
1031 Exchange
A tax-deferred swap of one investment property for another, deferring capital gains taxes.
Depreciation Recapture
The IRS requirement to pay taxes on accumulated depreciation deductions when a property is sold.
Appreciation
The increase in a property's value over time due to market conditions, improvements, or both.
Equity
The difference between a property's market value and the outstanding mortgage balance.
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