Capital Gains Tax Rate by State

Capital gains taxes are charged on profits generated from the sale of capital assets, such as real estate. While capital gains tax is essentially a federal tax on gains, states have their own rules and rates, which differ from federal tax treatment.

Capital gains taxes can significantly impact your profit from selling an asset. The capital gains tax levied against taxpayers depends on their income, how long they hold the asset, the asset class, and other factors.

Investors can increase investment returns and reduce tax liabilities by understanding how capital gains taxes impact their investments. It is also imperative for real estate investors to stay informed about state tax regulations and tax rates to improve their investment outcomes.

In this article, we’ll provide the information you need to stay current on how capital gains can affect your real estate investments and offer strategies to help you mitigate your tax liabilities and increase returns.

What are Capital Gains Taxes?

When you sell a capital asset such as a real estate property or stocks, you may receive some gain (or loss) from the transaction called capital gains. The government levies a tax amount on capital gains known as capital gains taxes.

If you own a capital asset that has appreciated in value since you acquired it, these gains are regarded as unrealized gains, which are taxed upon sale.

The IRS classifies capital gains into two categories based on how long you hold a property.

• Short-term capital gains refer to gains on an asset held for one year or less by the taxpayer. They are taxed at the ordinary income tax rate that ranges from 10% to 37%.
• Long-term capital gains refer to gains on an asset held for more than one year by the taxpayer. The tax rate for long-term capital gains is typically 0%, 15%, or 20%, depending on the income bracket of the taxpayer.

Federal and state tax authorities differ based on how they treat tax capital gains taxes. At the federal level, there is a uniform rule for all taxpayers when determining tax liabilities on capital gains, i.e., your capital asset is taxed based on the holding period.

In contrast, state taxes may differ greatly from each other. Some states, like California, may charge an ordinary income tax rate of up to 13.3%, whereas other states, like Florida and Texas, where the income tax rate is 0%, do not charge capital gains tax.

The type of asset or property you hold also affects your capital gain tax liabilities. For example, real estate properties are treated differently than stocks and bonds for tax purposes. You can claim an exclusion of up to $250,000 (if single) or $500,000 (if married) from capital gains taxes on the sale of your primary residence (provided you satisfy IRS’ ownership and use tests).

However, there is no similar exemption or exclusion for capital market assets like shares and bonds, meaning you are liable to pay taxes on profits based on the holding period of the asset.

Why Capital Gains Taxes Vary by State

While federal capital gains tax rates remain consistent nationwide, state-level capital gains taxes can vary significantly due to differing tax laws and policies across states. Here are some reasons why states may differ in local law and policies:

1. State Revenue Needs: Some states charge higher property tax rates than the national average, which reduces the need to rely on capital gains taxes for revenue. In other states, capital gains taxes may be an important funding source to support public services.
2. Differences in Economic Conditions: A state with a higher level of wealth can charge higher taxes on capital gains since the affordability is typically higher than in lower-income states.
3. Different Treatment of Long-Term vs. Short-Term Capital Gains: Some states tax long- and short-term capital gains at the same rate, such as California and New Jersey, where they are taxed as ordinary income. In contrast, states like Illinois and Utah charge a flat tax rate on capital gains, whether long-term or short-term.
4. Focus on Taxpayer’s Location: In some states, capital gains may be taxed based on where you live, whereas other states might tax gains based on where the income is earned. This can make it tricky for taxpayers to determine the correct jurisdiction and tax rate for their capital gains.

2024/2025 Capital Gains Tax Rates by State

Before diving into the table, it’s important to understand the difference between the two columns:

• Capital Gains Taxes as Ordinary Income: This refers to states that treat long-term capital gains as ordinary income, subjecting them to the same tax rates as regular income.
• 2025 State Tax Rate on Long-Term Capital Gains: This column specifies the tax rates applied specifically to long-term capital gains in each state, which may differ from the ordinary income tax rates.

Stay Informed to Maximize Returns

Understanding capital gains tax policies at both the federal and state levels is essential for optimizing investment returns. By planning ahead and using available tax-deferral strategies, investors can significantly reduce tax liabilities and increase profitability. For a stronger understanding of what your capital gains might look like, check out our capital gains tax calculator.

Register for an investor account today to explore tax-deferred investment opportunities.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.