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The advantage of capital gains, as opposed to ordinary income, is that the maximum tax rate on capital gains for most types of property held for more than one year is currently 15 percent through the end of 2011. In contrast, the top four ordinary income tax rates are all higher than this, with the top rate through 2011 at 35 percent.
There are some situations where other rates will apply to gains on certain types of property.
The long-term capital gains rate on business or investment real estate (called "section 1250 property" on the tax forms) will be 25 percent up to the amount of depreciation on the property while you owned it. However, there are no losses counted in the 25 percent rate group and any loss from this group must be taken into account in computing net gain or loss in the 15 percent rate group. Also, the long-term capital gains rate on collectibles such as art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines, or antiques is 28 percent.
For small business owners, capital gains have another advantage worth mentioning. Unlike the money you earn in your business, capital gains are not subject to the self-employment tax, which was 13.3 percent in 2011. However, if a major activity of your business is buying or selling property that would be capital gains property in the hands of the average taxpayer -- for example, you're a dealer in coins or stamps, or you're a real estate developer -- you will have to treat your gains on sales as ordinary business income, reported on Schedule C rather than Schedule D. In that case, you would be subject to self-employment tax on these gains.