To take advantage of the long-term rates, you need to hold the asset longer than one year. The long-term rate depends on two things, your marginal tax rate and how long you have held the asset. The lower preferential capital gains rates do not apply to gains from collectibles (stamp collections, coins, art work, etc.) and gain attributable to depreciation recapture on sales of certain real estate.
- If your marginal rate is 15% or under—Your long-term capital gains rate will be 0% through 2012 for property held longer than one year.
- If your marginal rate is above 15%—Your long-term capital gains rate will be 15% for property held longer than one year.
If you own shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to your benefit to pick the block of shares you sell based on their cost and holding period. If you cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes the mutual fund shares that are sold are considered to be the ones acquired first. When deciding whether to take a gain or hold for long-term rates, you should compare the savings associated with long-term rates to the financial risk of continuing to hold the investment.
These rates will continue through 2012. Taxpayers in the 15% or lower tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rates through 2012, possibly cashing in on existing gains while avoiding any federal tax on the gains.
Owners of homes used as their principal residence with gains exceeding the $250,000/$500,000 exclusion limits and owners of second homes which do not qualify for the home sale gain exclusion will especially benefit from the these reduced rates.