The short answer
A long-term capital gain is gain on a capital asset held more than one year, and a short-term capital gain is gain on one held one year or less, under section 1222. Long-term gain is taxed at 0%, 15% or 20% for 2026, while short-term gain is taxed at ordinary rates up to 37%. After a section 1031 exchange, the holding period of the property you gave up carries over to the replacement.
At a glance
| Dividing line | More than one year is long-term; one year or less is short-term |
|---|---|
| 2026 long-term bands, joint | 0% to $98,900; 15% to $613,700; 20% above |
| 2026 long-term bands, single | 0% to $49,450; 15% to $545,500; 20% above |
| After an exchange | The replacement's holding period includes the relinquished property's |
The definitions are in section 1222, and the counting rule is in Publication 544.
Section 1222 defines short-term capital gain as gain from a capital asset held "not more than 1 year" and long-term capital gain as gain from one held "more than 1 year." Publication 544 says to start counting on the day after you acquired the property and to include the day you dispose of it. For real property, the count starts the day after you received title or, if earlier, took possession and assumed the burdens and privileges of ownership.
Rental and business real estate is usually section 1231 property rather than a capital asset, but section 1231 uses the same more-than-one-year line, and a net section 1231 gain is treated as long-term capital gain.
Worked example: one day changes the rate.
Publication 544's own example: an asset bought June 17, 2024 and sold June 17, 2025 is not held longer than one year; sold June 19, 2025, it is. Applied to real estate, a closing on the anniversary date produces a short-term result.
Hypothetical: a single filer with $200,000 of other taxable income sells an investment lot for a $100,000 gain. Held one year or less, the gain is taxed at ordinary rates, and under Rev. Proc. 2025-32 the top 2026 rate is 37%. Held more than one year, the whole $100,000 falls inside the 15% band, which runs to $545,500 for single filers, for $15,000. The 3.8% net investment income tax under section 1411 can apply either way above the $200,000 single threshold. Run your own numbers with your CPA.
Where it bites: holding period tacking after an exchange.
Section 1223(1) includes the holding period of property given up in an exchange when the new property takes its basis in whole or in part from the old, and the old property was a capital asset or section 1231 property. Publication 544 says the new holding period begins on the same day as the old one. So a rental held for years and exchanged into a DST interest that is sold ten months later still produces long-term gain on the carried-over portion.
Tacking does not cure a short holding period on the property you sell, and short-term ownership can also undercut the investment intent that section 1031 requires; see how long to hold before a 1031. For short-term sales, see short-term capital gains on real estate; for the top band, the 20% capital gains threshold for 2026.
Related questions
Is inherited real estate always long-term?
Yes. Publication 544 says inherited property is treated as held longer than one year regardless of how long you actually held it.
Does a gift carry the donor's holding period?
Generally yes. Publication 544 says that if your basis is figured from the donor's basis, your holding period includes the donor's.
Do installment payments change the character?
No. Publication 544 says gain that is long-term in the year of sale stays long-term when later payments arrive, and short-term stays short-term.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. 1222, other terms relating to capital gains and losses (Cornell LII)
- 26 U.S.C. 1223, holding period of property (Cornell LII)
- IRS, Publication 544, Sales and Other Dispositions of Assets
- IRS, Rev. Proc. 2025-32, 2026 inflation adjustments
- 26 U.S.C. 1411, net investment income tax (Cornell LII)