Short Term Real Estate Capital Gains Tax Rules

When you sell a property for a profit after owning it for a short period, that profit is subject to the short-term real estate capital gains tax. This tax applies to properties held for one year or less. The tax treatment for these gains is distinct from that of long-term gains, which are for assets held more than a year. The profit you realize is considered income and is taxed at your ordinary rate, impacting your tax liability for the year of the sale.

Determining Your Holding Period

The holding period is the primary factor that determines whether your capital gain is short-term or long-term. According to the IRS, the holding period begins on the day after you acquire the property and ends on the day you sell it. The acquisition date is the closing date specified in your settlement documents.

For a gain to be classified as short-term, you must own the property for one year or less. For example, if you acquired a property on May 15, 2024, your holding period starts on May 16, 2024. A sale on or before May 15, 2025, results in a short-term gain, while a sale on May 16, 2025, would be long-term.

Calculating the Taxable Gain

To determine your taxable profit, you must calculate your gain using a specific formula. The formula is the property’s selling price minus both your selling expenses and the property’s adjusted basis. Selling expenses are costs associated with the sale, such as:

• Real estate agent commissions
• Advertising fees
• Legal fees
• Escrow fees
• Title insurance

The adjusted basis begins with the property’s original purchase price. This initial basis is increased by certain settlement fees and closing costs from the time of purchase, including abstract fees, survey fees, transfer taxes, and owner’s title insurance.

Your basis is also increased by the cost of capital improvements made during your ownership. A capital improvement adds value to the property, prolongs its life, or adapts it to new uses, unlike simple repairs which only maintain its condition. Examples of capital improvements include:

• Adding a new room
• Installing a new roof
• Paving the driveway
• Extensively remodeling a kitchen

Your final adjusted basis is the initial cost plus settlement fees and capital improvements. For instance, if you bought a house for $300,000, paid $5,000 in closing costs, and spent $40,000 on a new kitchen, your adjusted basis is $345,000. This amount is subtracted from the net sale proceeds to determine your taxable gain.

Understanding the Tax Rate

Profit from a short-term real estate sale is not eligible for preferential tax rates and is instead taxed at your ordinary income tax rate, the same rate that applies to your wages. The gain is added to your other income for the year, and the total is taxed according to the federal income tax brackets. This additional income could push you into a higher tax bracket.

For the 2025 tax year, federal ordinary income tax rates range from 10% to 37%, depending on your total taxable income and filing status. Most states also levy an income tax, and this short-term gain will be subject to state taxation as well.

Strategies for Tax Reduction

While options are more limited for short-term sales, some strategies may reduce your tax burden. The main home sale exclusion allows eligible taxpayers to exclude up to $250,000 of gain ($500,000 for married couples filing jointly). However, this exclusion requires you to have owned and lived in the home as your primary residence for at least two of the five years before the sale, a test most short-term sales fail.

A partial exclusion may be available if you sell your home for a reason the IRS considers an unforeseen circumstance, even if you do not meet the two-year test. These can include a change in health, a job-related move, or other significant life events. For a job-related move to qualify, your new workplace must be at least 50 miles farther from the home than your old job was.

For investment properties, a like-kind exchange allows you to defer capital gains tax by reinvesting the proceeds into a similar property. This strategy requires identifying a replacement property within 45 days and completing the exchange within 180 days. Another strategy is tax-loss harvesting, where you can use capital losses from selling other assets, like stocks, to offset your real estate capital gains.

Reporting the Sale on Your Tax Return

You will primarily use Form 8949, Sales and Other Dispositions of Capital Assets, to detail the transaction. On this form, you must provide a description of the property, the date you acquired it, the date you sold it, the sales price, and the cost or other basis you calculated.

Because the property was held for one year or less, you will report the transaction in Part I of Form 8949, which is designated for short-term transactions. The totals from Part I are then transferred to Schedule D (Form 1040), Capital Gains and Losses.

Schedule D summarizes your short-term and long-term capital gains and losses from all sources. The final net short-term gain from your real estate sale is combined with other gains or losses. This final figure is then reported on your main tax return, Form 1040, and becomes part of your total taxable income.