Gains from stocks and mutual funds are taxed at a lower rate than regular income. But those aren’t the only investments from which you can get the lower capital gains rate.
If you’re a stock or mutual-fund investor, then you probably know that investments held for more than a year and sold for a profit are subject to lower tax rates as long-term capital gains. Generally speaking, if you’re in the 25% tax bracket or higher, you will owe 15% of your profits to the Internal Revenue Service. If you’re in the upper-income category, you may owe the maximum 20% rate for 2013 and beyond.
But what you might not realize is that more than just stock and mutual-fund shares are eligible for favorable capital-gains tax treatment.
If you sold, say, your vacation time share or your country-club membership, then you just might be pleasantly surprised to discover you’ll owe only 15%, or at most 20%, on the gain (assuming that you held the asset for more than a year).
Here’s a list of some of the most common types of assets potentially subject to these lower rates:
- Securities options (as in puts and calls) held as personal investments.
- Stock of closely-held corporations.
- Collectibles held as personal investments, like baseball cards, stamps, rare coins, art, etc. In this case, a 28% (not 20%) maximum federal tax rate applies.
- Personal residences (including vacation homes). In this case, the 15% or 20% rate generally applies to gains beyond what you can exclude (not pay tax on) under the $250,000/$500,000 home-sale gain exclusion privilege. However, a 25% maximum rate applies to gains triggered by certain depreciation deductions claimed against your property.
- Vacation time-share interests.
- Country-club memberships.
- Personal autos (that aren’t collectibles). This means that you’ve sold your car at a profit, which is unlikely.
- Personal-property items (that aren’t collectibles) in general — such as jewelry, furniture, a lawn mower and so on.
- Rental real estate owned by an individual, partnership, limited-liability company or S corporation. (The standard 20% maximum rate applies, but gains from, property, depreciation, deductions may be taxed at up to 25%.)
- Land held as an investment by an individual, partnership, limited-liability company or S corporation.
- Your ownership interest in a partnership or a limited-liability company. In this case, the 20% maximum rate usually applies, although depending on the assets of the partnership or limited-liability company, part of your gain may be taxed at higher rates of up to 39.6%.
- Land used in a business owned by an individual, partnership, limited-liability company or S corporation. This could be the actual land that your small business is located on, or it could be land held by your small business, such as an apple orchard.
- Options to buy investment land when the option is owned by an individual, partnership, limited-liability company or S corporation. This is the option to buy land at a certain price over a set period of time. It could be, for example, that you’ve purchased the option to buy a plot of land that you think is going to appreciate because of future development in the area.
- The right to receive money for release of a restrictive covenant in a land deed when the deed is owned by an individual, partnership, limited-liability company or S corporation.
- The right to a condemnation award when the right is owned by an individual, partnership, limited-liability company or S corporation. This would apply if, say, your property were condemned by the city so that it could take over the land and build a civic building.
- The right of a tenant to receive a lease-cancellation payment when the tenant is an individual, partnership, limited-liability company or S corporation. This would apply if you were renting property and your landlord cancelled your lease.
- Contract rights owned by an individual, partnership, limited-liability company or S corporation. For example, you might own a license giving you the right to use a software program. If you can sell that license to someone else for a gain, it will be taxed at no more than 20%.
- Most other intangible business assets (such as intellectual property, trade secrets, goodwill and so on) owned by an individual, partnership, limited-liability company or S corporation. In these cases, the 20% maximum rate generally applies. However, if the business intangible was amortized, gains attributable to the amortization deductions are taxed at your regular rate (up to 39.6%).
- A stock-exchange membership owned by an individual, partnership, limited-liability company or S corporation. Obviously, there aren’t too many of these, but this does apply to regional exchanges as well.
- Depreciable or amortizable assets used in business — provided the asset is owned by an individual, partnership, limited-liability company or S corporation. Gains attributable to depreciation or amortization deductions are generally taxed at your regular rate (up to 39.6%). The 20% maximum rate generally applies to the balance of the gain.
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