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Investments and the Capital Gains Rules

I. CAPITAL GAIN PROVISIONS – THE RULES (IRC § 1(H))

The following rates apply to individuals, estates and trusts and generally apply to sales and exchanges after May 5, 2003.

  • The maximum tax rate on net capital gains is 15% for sales after May 5, 2003 through 12/31/10.  To the extent that individuals are in the 15% bracket, the capital gains tax rate is lowered to 5%.
  • The gain element of installment sale payments received after May 5, 2003, is taxed at the 5%/15% rate, even though the sale took place earlier.
  • Depreciation on sales of real estate will be recaptured at a 25% rate.
  • The same tax rates (e.g., 5%/15/5/25/5) apply to capital gains for alternative minimum tax (AMT) purposes.  However, a large capital gain often triggers the alternative minimum tax (as illustrated later).
  • For the years 2008 – 2010, the capital gains rate remains at 15% and the 5% rate for low income taxpayers drops to zero.  On January 1, 2011, the old pre JGTRRA rates of 10%/20% return

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