Investment real estate
The 25% rate
Who’s Eligible: Property owners and real-estate investment trust (REIT) investors in the 25% income-tax bracket or higher who hold property for more than one year.
Investment real estate gains are tricky since they can be taxed in two different ways. If you claim depreciation deductions, at least some of those gains (so-called unrecaptured Section 1250 gains) are taxed at a maximum federal rate of 25%.
For example, say you own a rental duplex and have deducted $32,000 of depreciation over the years. That depreciation reduces your basis in the property and results in a bigger taxable gain (or smaller loss) when you sell. Now you sell for a $100,000 gain. The first $32,000 (the unrecaptured Section 1250 gain) is taxed at a maximum federal rate of 25%. The remaining $68,000 of gain is taxed at the “general rule” maximum federal rate of no more than 20%.
If you own shares in a REIT, you can receive capital-gains distributions subject to the 25% maximum rate. This happens when the REIT sells a piece of depreciable property and distributes the profit to its shareholders.
To the extent an unrecaptured Section 1250 gain falls into the 10% or 15% bracket, it gets taxed at that rate.