--- title: Understanding Short-Term vs. Long-Term Capital Gains in Real Estate description: Learn more about understanding short-term vs. long-term capital gains in real estate. image: https://www.realized1031.com/hubfs/iStock-2227363129-modified-2a7a0500-4b3e-4851-af8e-f78eec6f1dde.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Understanding Short-Term vs. Long-Term Capital Gains in Real Estate Posted Sep 30, 2025 ![iS-2227363129](https://www.realized1031.com/hs-fs/hubfs/iStock-2227363129-modified-2a7a0500-4b3e-4851-af8e-f78eec6f1dde.jpg?width=2121&height=1193&name=iStock-2227363129-modified-2a7a0500-4b3e-4851-af8e-f78eec6f1dde.jpg) The whole point of investing is to make your money work for you. As your assets earn or appreciate, they increase in value. When you sell these assets, like real estate, the profit you make is called capital gains. This profit is a type of income, so of course it will be taxed. For the purposes of taxation, capital gains are separated into two categories: short-term and long-term capital gains. What is the difference between these two categories, especially in the context of real estate taxes? Realized 1031 has shared a comprehensive guide to answer this question. Let’s take a closer look. ### Real Estate Capital Gains 101 In the context of real estate investing, capital gains are the profit you make[ after selling a property at a price higher than the initial purchase price](https://www.investopedia.com/terms/c/capitalgain.asp) or adjusted basis (after expenses like improvements and closing costs). The IRS categorizes capital gains as taxable income, and the rates you’ll follow depend on how long you held the property before conducting the sale. The basic formula for calculating capital gains is this. **Selling Price – (Purchase Price + Capital Improvements + Selling Costs) = Capital Gain** All the addends within the parentheses amount to the adjusted basis. Let’s say that you bought an apartment complex for $500,000. Due to favorable conditions, you sold it for $800,000. However, you needed to perform $20,000 in repairs and required $10,000 in closing costs. $800,000 – ($500,000 + $20,000 + $10,000) = $270,000 in capital gains. The rate that you’ll need to follow when paying for capital gains taxes will depend on how long you held the apartment complex. ### Short-term Capital Gains Profits from a property you held for one year or less fall under short-term capital gains taxes. In the example we shared above, if you sold your apartment complex 11 months after purchase, then any gains made will fall under this category. Short-term capital gains follow ordinary income rates. As such, you can pay as much as [37% if you belong to the highest tax bracket](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025), which could mean $99,900 in the example we shared above. The higher rates can catch investors off guard. Plus, there is no preferential tax treatment or inclusions for short-term cap gains. As a result, many investors prefer to hold their assets for longer to enjoy more benefits. ### Long-term Capital Gains Any profit you make after selling real estate you’ve held for more than a year falls under long-term capital gains. This classification follows capital gains tax rates, which have a lower maximum rate than ordinary income. Those in the highest tax bracket will only need to pay[ 20% of the amount](https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates#:~:text=Profits%20from%20the%20sale%20of%20an%20asset%20held%20for%20more,taxable%20income%20and%20filing%20status.). If you hold on to the apartment complex in our example for two years, then the profit you gain will follow capital gains tax rates. You could be paying as much as $54,000, a significantly smaller amount than the $99,000 you’d pay if you held the asset for under a year. ### Key Differences Between Short-term and Long-term Capital Gains Knowing the differences between these two categories is critical for investors, helping you make more informed decisions for your real estate transactions. To summarize the specific distinctions shared, here’s a definitive list. ### Holding Period - **Short-term: **Property held for 1 year or less - **Long-term: **Property held for more than 1 year ### Tax Rate - **Short-term: **Taxed as ordinary income (10%–37%) - **Long-term: **Taxed at preferential rates (0%, 15%, or 20%) ### Tax Burden - **Short-term: **Typically results in higher tax liability - **Long-term: **Often leads to lower taxes on the same gain Long-term capital gains are not automatically the better option, even though they could significantly reduce your tax burden. You also have to consider your investment goals or current needs. For example, if you’re in the house flipping industry, then short-term capital gains may be a more appropriate and expected outcome for your business model. Those who need to relocate or need liquid cash for an unexpected expense may also want to sell immediately. As such, it’s important to look at the bigger picture to determine which scenario best suits you.. ### Ways to Lower Capital Gains Taxes Even with long-term cap gains tax rates, the amount you may need to pay is still high. As such, many investors adopt strategies that help lower tax liability or delay it. Here are some popular options available today. ### 1031 Exchange A [1031 exchange](https://www.realized1031.com/blog/the-1031-exchange-purchase-process-steps-rules-and-strategies) is a tax-advantaged transaction that involves the swap of two like-kind properties. In particular, both must have been held for investment or business use. By conducting this type of transaction according to IRS parameters, an investor or property owner can defer capital gains taxes from the relinquished property. This benefit allows you to keep your equity working for longer while accessing new sectors. 1031 exchanges can also be ended through a [Delaware Statutory Trust (DST)](https://www.realized1031.com/blog/why-use-a-delaware-statutory-trust-dst). DSTs are investment vehicles where you acquire fractional interests in exchange for your property sale proceeds. Investing in DSTs provides additional benefits apart from long-term capital gains tax deferral, such as truly passive income and improved portfolio diversification. ### 721 Exchanges A 721 exchange is another tax-deferred transaction where you contribute your property to an [umbrella partnership real estate investment trust](https://www.realized1031.com/blog/upreit-721-exchange-what-they-are-how-they-work) (UPREIT) in exchange for operating partnership (OP) units. These are the economic equivalent of shares, and you receive dividends proportional to the number of OP units you own. The IRS doesn’t recognize gains or losses during the UPREIT contribution, so you can delay capital gains tax payments until a taxable event happens. ### Installment Sales You can also leverage an installment sale structure when selling your property. As you receive the cash in yearly increments, you’re liable to smaller capital gains tax payments instead of one huge lump sum. ### Final Thoughts on Short-Term vs. Long-Term Capital Gains The most significant takeaway from the discussion on short-term and long-term capital gains is the difference in tax treatments. The lower rates for the latter category can help you make significant tax savings, making long-term capital gains the ideal option for many. However, your choice still depends on your current situation and long-term investment goals. Consulting with your tax advisor and financial advisor is still the best practice to ensure that you’re making informed decisions. **Sources:** [https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates](https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates#:~:text=Profits%20from%20the%20sale%20of%20an%20asset%20held%20for%20more,taxable%20income%20and%20filing%20status) [https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025) [https://www.investopedia.com/terms/c/capitalgain.asp](https://www.investopedia.com/terms/c/capitalgain.asp) Download The Capital Gains Tax Calculator [![Cap Gains Calculator For Investors](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/laptop-capital-gains-calculator-spreadsheet.jpg?width=500&height=290&name=laptop-capital-gains-calculator-spreadsheet.jpg "Estimate the cap gains tax owed ...") ](https://www.realized1031.com/blog/understanding-short-term-vs.-long-term-capital-gains-in-real-estate#blogform) Download Calculator ---   --- ### Cap Gains Calculator For Investors ![Download The Capital Gains Tax Calculator](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/laptop-capital-gains-calculator-spreadsheet.jpg?width=500&height=290&name=laptop-capital-gains-calculator-spreadsheet.jpg) Estimate the cap gains tax owed after selling an asset or property By providing your email and phone number, you are opting to receive communications from Realized. 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For the purposes of taxation, capital gains are separated into two categories: short-term and long-term capital gains. What is the difference between these two categories, especially in the context of real estate taxes? Realized 1031 has shared a comprehensive guide to answer this question. Let’s take a closer look. Real Estate Capital Gains 101 In the context of real estate investing, capital gains are the profit you make after selling a property at a price higher than the initial purchase price or adjusted basis (after expenses like improvements and closing costs). The IRS categorizes capital gains as taxable income, and the rates you’ll follow depend on how long you held the property before conducting the sale. The basic formula for calculating capital gains is this. Selling Price – (Purchase Price + Capital Improvements + Selling Costs) = Capital Gain All the addends within the parentheses amount to the adjusted basis. Let’s say that you bought an apartment complex for $500,000. Due to favorable conditions, you sold it for $800,000. However, you needed to perform $20,000 in repairs and required $10,000 in closing costs. $800,000 – ($500,000 + $20,000 + $10,000) = $270,000 in capital gains. The rate that you’ll need to follow when paying for capital gains taxes will depend on how long you held the apartment complex. Short-term Capital Gains Profits from a property you held for one year or less fall under short-term capital gains taxes. In the example we shared above, if you sold your apartment complex 11 months after purchase, then any gains made will fall under this category. Short-term capital gains follow ordinary income rates. As such, you can pay as much as 37% if you belong to the highest tax bracket, which could mean $99,900 in the example we shared above. The higher rates can catch investors off guard. Plus, there is no preferential tax treatment or inclusions for short-term cap gains. As a result, many investors prefer to hold their assets for longer to enjoy more benefits. Long-term Capital Gains Any profit you make after selling real estate you’ve held for more than a year falls under long-term capital gains. This classification follows capital gains tax rates, which have a lower maximum rate than ordinary income. Those in the highest tax bracket will only need to pay 20% of the amount. If you hold on to the apartment complex in our example for two years, then the profit you gain will follow capital gains tax rates. You could be paying as much as $54,000, a significantly smaller amount than the $99,000 you’d pay if you held the asset for under a year. Key Differences Between Short-term and Long-term Capital Gains Knowing the differences between these two categories is critical for investors, helping you make more informed decisions for your real estate transactions. To summarize the specific distinctions shared, here’s a definitive list. Holding Period Short-term: Property held for 1 year or less Long-term: Property held for more than 1 year Tax Rate Short-term: Taxed as ordinary income (10%–37%) Long-term: Taxed at preferential rates (0%, 15%, or 20%) Tax Burden Short-term: Typically results in higher tax liability Long-term: Often leads to lower taxes on the same gain Long-term capital gains are not automatically the better option, even though they could significantly reduce your tax burden. You also have to consider your investment goals or current needs. For example, if you’re in the house flipping industry, then short-term capital gains may be a more appropriate and expected outcome for your business model. Those who need to relocate or need liquid cash for an unexpected expense may also want to sell immediately. As such, it’s important to look at the bigger picture to determine which scenario best suits you.. Ways to Lower Capital Gains Taxes Even with long-term cap gains tax rates, the amount you may need to pay is still high. As such, many investors adopt strategies that help lower tax liability or delay it. Here are some popular options available today. 1031 Exchange A 1031 exchange is a tax-advantaged transaction that involves the swap of two like-kind properties. In particular, both must have been held for investment or business use. By conducting this type of transaction according to IRS parameters, an investor or property owner can defer capital gains taxes from the relinquished property. This benefit allows you to keep your equity working for longer while accessing new sectors. 1031 exchanges can also be ended through a Delaware Statutory Trust (DST). DSTs are investment vehicles where you acquire fractional interests in exchange for your property sale proceeds. Investing in DSTs provides additional benefits apart from long-term capital gains tax deferral, such as truly passive income and improved portfolio diversification. 721 Exchanges A 721 exchange is another tax-deferred transaction where you contribute your property to an umbrella partnership real estate investment trust (UPREIT) in exchange for operating partnership (OP) units. These are the economic equivalent of shares, and you receive dividends proportional to the number of OP units you own. The IRS doesn’t recognize gains or losses during the UPREIT contribution, so you can delay capital gains tax payments until a taxable event happens. Installment Sales You can also leverage an installment sale structure when selling your property. As you receive the cash in yearly increments, you’re liable to smaller capital gains tax payments instead of one huge lump sum. Final Thoughts on Short-Term vs. Long-Term Capital Gains The most significant takeaway from the discussion on short-term and long-term capital gains is the difference in tax treatments. The lower rates for the latter category can help you make significant tax savings, making long-term capital gains the ideal option for many. However, your choice still depends on your current situation and long-term investment goals. Consulting with your tax advisor and financial advisor is still the best practice to ensure that you’re making informed decisions. Sources: https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025 https://www.investopedia.com/terms/c/capitalgain.asp", "articleSection" : [ "Capital Gains" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2025-09-30T14:00:03+0000", "datePublished" : "2025-09-30T14:00:03+0000", "description" : "Learn more about understanding short-term vs. long-term capital gains in real estate.", "headline" : "Understanding Short-Term vs. Long-Term Capital Gains in Real Estate", "image" : { "@type" : "ImageObject", "height" : 1193, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2227363129-modified-2a7a0500-4b3e-4851-af8e-f78eec6f1dde.jpg", "width" : 2121 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/understanding-short-term-vs.-long-term-capital-gains-in-real-estate", "name" : "Understanding Short-Term vs. Long-Term Capital Gains in Real Estate", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2227363129-modified-2a7a0500-4b3e-4851-af8e-f78eec6f1dde.jpg" } ```