Understanding the tax consequences is an important factor when selling investment properties or other appreciated assets. One common question we hear at Realized® is: Do short-term capital gains count towards Adjusted Gross Income (AGI)?
The short answer? Yes, they do. And depending on the size of the gain, it can significantly impact your overall tax situation.
Here's what property owners should know when planning to sell an asset and manage their investment property wealth.
Your Adjusted Gross Income (AGI) is your total gross income — including wages, rental income, dividends, business income, and capital gains — reduced by certain IRS-permitted deductions, often referred to as “adjustments to income” or “above-the-line deductions.” Common adjustments include: IRA contributions, student loan interest, or health savings account contributions.
AGI is the starting point for calculating your taxable income, impacting your eligibility for deductions, credits, and additional taxes. It's a key number that affects everything from your marginal tax rate to your Medicare premiums.
While AGI influences your tax burden, it does not by itself determine your final tax liability. Taxable income, credits, and filing status all play a role. Additionally, AGI may affect your ability to claim passive activity losses, deductions related to real estate investments, or benefits.
Short-term capital gains are included in your AGI. They're treated just like ordinary income for tax purposes. Short-term gains occur when you sell an asset (such as a rental property, stocks, or other investments) you've owned for one year or less.
Unlike long-term capital gains, which benefit from preferential tax rates, short-term capital gains are taxed at your ordinary income tax rates, ranging from 10% to 37%, depending on your income bracket.
Because they're taxed as regular income, short-term gains can increase your total taxable income and increase your AGI, impacting:
In other words, realizing a sizable short-term gain can trigger higher taxes across multiple areas. While short-term capital gains can increase your income and move a portion of it into a higher marginal tax bracket, only the income that exceeds each bracket threshold is taxed at the higher rate.
If you're selling an investment property that you've held for less than 12 months, or realizing gains from other investments, you should carefully consider the timing and tax consequences.
For example, selling a recently acquired property could cause:
At Realized®, we help investment property owners think holistically about wealth management strategies, including when and how to sell property to minimize taxes and maximize after-tax wealth.
Depending on your situation, there may be ways to manage the impact of short-term gains, such as:
Every investor’s tax and financial situation involves different considerations, which is why individualized planning may be beneficial.
Are you thinking about selling an investment property?
Talk to Realized® today about strategies that may help manage short-term capital gains and support your long-term investment goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.