Difference between Long Term and Short-Term Capital Gains of Estates
Are you going to be selling stock, assets, or possibly real estate in 2024?
It is imperative that you understand the difference between long-term and short-term capital gains before selling.
If the investment property, whether it’s a car, building or stock, is held for more than one year (365 days), the capital gain or loss is long-term.
If the property, car or stock is held for one year or less, the capital gain or loss is short-term.
Long term capital gains (LTCG) are taxed at a reduced rate compared to short term gains (STCG). The tax rate for LTCG’s is taxed between zero and twenty percent. The tax rate for STCG’s is at ordinary income which could be as much as thirty seven percent.
Pretty simple.
When investment property is inherited, the capital gain (or loss) when the property is sold is treated as a long-term capital gain.
This is true aside from how long the taxpayer actually held the inherited property. (IRS Publication 551). This could be a huge benefit when a beneficiary elects to sell an inherited building or property. Even better, there is a step up in basis upon the death of the original owner.
Generally, the delta between the basis (your cost) and sale price determines the tax liability owed to the IRS upon the sale. A step up in basis means the cost is not the cost paid by the original owner (thank goodness) but the fair market value at the time the original owner passed away.
There is an alternative called the alternate valuation method which is the fair market value six months after the original owner passed. This alternative valuation date is only valid if the property is not sold, distributed, or otherwise disposed of within 6 months after the decedent’s death. If the property is sold, the value that is used in determining cost basis is the value of the property at the date of sale.
If you own a building, a cost segregation study combined with the step up in basis is almost too good to be true. A cost study done during the original owner’s life will create a very nice tax deferral by accelerating a portion of the depreciation. Generally, this accelerated depreciation will reduce the basis and increase the taxes owed. And the accelerated depreciation is “paid back” at the ordinary income (as high as thirty seven percent) bracket at the time of sale. “Normal” depreciation is paid back at twenty five percent.
There is no paying back the accelerated depreciation deferral created by the original owner when he passes away. The deferral becomes a permanent deduction. Even better, because the death of the original owner is a taxable event, the depreciation clock starts all over again which means another cost segregation study can be done on the new, higher, property value.
If you have parents or grandparents who own buildings or rental properties, suggest having them do a cost segregation study, especially if you or someone close to you will inherit the property.