By Jodi Summers

Do you recall several years ago when presidential candidates were talking about an across-the-board flat tax of 15 percent? That would have made life way too easy. As usual, the IRS has a complex system. The tax rate on short-term capital gains — assets held for one year or less — are taxed at your normal income tax rate of 10 percent to 35 percent. When you sell a taxable item, such as real estate or stock, that you have owned more than a year, you pay a sliding scale of fees that can range from 0 percent to 28 percent depending upon the nature of the capital gain. The taxes you pay on any given sale depend on your income-tax bracket, the type of asset you sold, how long you held it and when you sold it. Smartmoney.com’s Bill Bischoff offers highlights on the breakdown on who pays what with long-term capital gains.

INVESTMENT SECURITIES

The 5 percent rate:

Eligibility: Individuals in the 10 percent and 15 percent federal income tax brackets with net long-term capital gains from selling investment securities held for more than one year.

Individuals in the 10 percent and 15 percent bracket in 2005 earned a taxable income of up to $29,700 for singles, $59,400 for joint filers, $39,800 for heads of households, and $29,700 for married individuals who file separately. Here’s how this rule works in real life. Say you’re a joint filer and have $55,000 of “regular” taxable income in 2005 and a net long-term gain of $10,000 from stock sales. The first $4,400 of gain ($59,400 - $55,000) will be taxed at only 5 percent. The remaining $5,600 ($10,000-$5,600) will get taxed at the 15 percent rate you hear so much about. If the net long-term gain is $4,400 or less, the tax rate is 5 percent on the entire gain.

The 15 percent percent rate:

Eligibility: Individuals in the 25 percent federal income tax bracket or higher with net long-term capital gains from selling investment securities held for more than one year.

REAL ESTATE (OWNED AS AN INVESTMENT)

The 25 percent rate:

Eligibility: Property owners and real estate investment trust (REIT) investors in the 25 percent income-tax bracket or higher who hold property for more than one year.

Investment real-estate gains 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 rate of 25 percent.

For example, say you own a rental property 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. Say you sold in 2005 for a $100,000 gain. The first $32,000 (the unrecaptured Section 1250 gain) is taxed at a maximum rate of 25 percent. The remaining $68,000 of gain is taxed at the “general rule” maximum rate of 15 percent. (An unrecaptured Section 1250 gain that falls into the 10 percent or 15 percent bracket gets taxed at that rate.)

If you own shares in a REIT, you can receive capital-gains distributions subject to the 25 percent maximum rate. This happens when the REIT sells a piece of depreciable property and distributes the profit to its shareholders.

COLLECTIBLES AND SMALL BUSINESS STOCK

The 28 percent rate:

Eligibility: Any collector in the 28 percent tax bracket or higher; some small business stock shareholders.

Net long-term gains from collectibles (stamps, coins, baseball cards, Beanie Babies and the like) are subject to a 28 percent maximum rate rather than the usual 15 percent. This is one reason stocks are a much better investment than Beanie Babies. (To the extent a long-term collectibles gain falls into the 10 percent or 15 percent bracket, it’s taxed at that rate.)

The 28 percent maximum rate also applies to the taxable part of a gain from selling certain small-business stock that qualifies for a special 50 percent gain exclusion rule (under the tax code). Basically, these are shares in relatively small corporations that were originally issued to you and that you’ve owned more than five years. Consult your tax adviser for more information on this subject.

HOMES AND SMALL-BUSINESS STOCK

The 0 percent rate:

Eligibility: Homeowners who owned and used their home as a main residence for at least two years before selling; some shareholders of small-business stock.

If you sell a home you’ve owned and used as your main residence for at least two years out of the five-year period, you are allowed to exclude up to $250,000 of gain tax free. If you are married, you can potentially exclude up to $500,000.

If your gain exceeds the amount you can exclude, the difference is treated as a long-term capital gain eligible for the 15 percent maximum rate (or 5 percent or 10 percent if your taxable income is low enough).

Up to 50 percent of the gain from selling certain small-business stock can be excluded from your federal tax return. Again, consult a tax pro if you think you might qualify for this break.

For more information on capital gains, try www.smartmoney.com.

For making capital gains and other tax scenarios work for you, please consult your accountant.

(Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. Contact her at jodis@boardwalkrealty.com, or call 310-309-4219. Visit her Web site at www.santamonicalandmarks.com.)