Short-Term Capital Gains on Real Estate Sold Within a Year

The one-year line is counted in days, and the anniversary itself is still short-term

Section 1222 draws the line at 'a capital asset held for not more than 1 year'. Gain on the long side of that line is long-term and eligible for the 0%, 15% and 20% rates in section 1(h); gain on the short side is ordinary income. IRS Topic 409 puts it plainly: 'Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.'

Publication 544 explains how to count. The holding period starts the day after you acquired the property, so a closing on the first anniversary of your purchase is a sale of property held exactly one year, which is still 'not more than 1 year'. Close the next day and the gain is long-term. If a closing is near the line, confirm the acquisition date on your settlement statement and count from the following day.

Two groups are automatically on the long side. Inherited property is treated as held for more than one year under section 1223(9), however quickly the heir sells. Property received in a section 1031 exchange takes the holding period of the property given up under section 1223(1), because its basis is determined by reference to the old property.

A rental sold inside a year is ordinary income on Form 4797, not a short-term capital gain

Property used in a trade or business, which is how most rentals are classified, is excluded from the definition of a capital asset by section 1221(a)(2). Section 1231 gives such property capital gain treatment only if it is 'held for more than 1 year'. Sold inside that period, it is neither a capital asset nor section 1231 property, so the Form 4797 instructions send it to Part II, which covers 'gains and losses from property held 1 year or less'.

The difference from a short-term capital gain is small on the rate, because both are ordinary, but it matters for netting. A Part II gain is ordinary income that capital losses do not reach directly, while a short-term capital gain on investment land reported on Schedule D can be offset by them. Where boot and recapture land on Form 4797 and Schedule D is covered separately.

Depreciation makes the short hold worse. Section 1250(b)(1) treats all depreciation on property held one year or less as 'additional depreciation', so every dollar of it is recaptured as ordinary income under section 1250(a), not at the 25% ceiling that applies after a year. The 25% rate and how it stacks is explained on the recapture page.

In 2026 the ordinary brackets run from 10% to 37%, and the surtax usually adds 3.8%

Rev. Proc. 2025-32 sets the 2026 brackets. On a joint return the 24% bracket runs from $211,400 to $403,550 of taxable income, 32% to $512,450, 35% to $768,700, and 37% above that. Single filers reach 24% at $105,700, 32% at $201,775, 35% at $256,225 and 37% at $640,600. A large gain stacks on top of wages and other income, so the marginal bracket on the gain is often higher than the one you normally occupy.

Section 1411 adds 3.8% on the lesser of net investment income or modified adjusted gross income above $250,000 joint or $200,000 single, thresholds the Form 8960 instructions confirm are not indexed. Gain from the disposition of investment or rental real estate is net investment income whether it is short-term or long-term, so the combined top federal rate on a short-term real estate gain is 40.8%.

State income tax sits on top of all of that, and most states tax long-term and short-term gains alike, so the holding period matters less for the state bill. The state pages cover each state's treatment of a sale and an exchange.

A hypothetical $200,000 gain costs about $22,000 more if you close before the anniversary

Take a hypothetical married couple with $250,000 of taxable income from work who bought a parcel of investment land for $600,000 and have an $800,000 offer eleven months later. Ignore selling costs. The $200,000 gain is a short-term capital gain if they close now.

• Close now: the gain fills the rest of the 24% bracket up to $403,550 ($153,550 at 24%, or $36,852) and the remaining $46,450 falls in the 32% bracket ($14,864). Federal income tax about $51,700, plus the 3.8% surtax of $7,600, so roughly $59,300.
• Close after the anniversary: the whole $200,000 is adjusted net capital gain, and with taxable income of $450,000 it sits entirely inside the 15% band, which ends at $613,700 for joint filers in 2026. Tax $30,000 plus the same $7,600 surtax, so roughly $37,600.
• The difference is about $21,700 on this gain, and it widens as the gain or the bracket rises. Run your own numbers with your CPA, including the state.

Waiting, financing the buyer, or exchanging can each move the gain past the line

The simplest fix is to close after the anniversary. A buyer who is ready now can sometimes be held with a contract that sets a later closing date; whether that works depends on the contract and the lender, and it does nothing if the buyer walks. Seller financing does not change the character of the gain, so an installment note spreads a short-term gain over years but keeps it ordinary. How installment sales compare with an exchange is covered separately.

A section 1031 exchange defers the gain regardless of holding period, because section 1031(a)(1) asks whether the property was held for productive use in a trade or business or for investment, not for how long. There is no statutory minimum. The risk is intent: section 1031(a)(2) excludes 'real property held primarily for sale', and a purchase followed by a quick resale invites the question whether you ever held it for investment. How long to hold before exchanging and why a fix and flip usually cannot exchange deal with that line.

If the exchange is completed, section 1223(1) tacks the old holding period onto the replacement property, so a later sale of the replacement counts the months you held the first property. What happens at that later sale is set out on its own page.

If you are a dealer, none of this is about holding period

Someone who buys houses to resell is in a different rule entirely. Property 'held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business' is excluded from capital asset status by section 1221(a)(1), so the gain is ordinary no matter how long the property was held, self-employment tax can apply, and section 1031 is unavailable. Why a house flip is usually ordinary income covers dealer status in full. This page is for the investor who simply sold early.

If an exchange is the route, replacement property has to be identified within 45 days and received within 180 days under section 1031(a)(3), and a Delaware Statutory Trust interest can close inside that window. Traditional DST solutions describe the structure.