The one-year holding rule
The IRS distinguishes between short-term gains (held one year or less) taxed at ordinary income rates, and long-term gains (held more than one year) taxed at preferential 0%, 15%, or 20% rates. For real estate, the holding period runs from the acquisition date to the sale date. Selling one day before the one-year anniversary can cost significantly more — on a $200,000 gain, the difference between a 32% ordinary rate and a 15% long-term rate is $34,000.
Short-term sales: ordinary rates on everything
If you sell within one year, the entire gain — including the portion that would otherwise be classified as depreciation recapture on a long-term sale — is taxed at ordinary income rates. The 25% cap on Section 1250 recapture does not apply to short-term sales. For high earners (32-37% brackets), the tax cost of selling early can be enormous. Property flips and quick dispositions regularly hit short-term treatment.
Why the line isn't always clean
Certain sellers are treated as dealers — they hold property for sale in the ordinary course of business rather than as an investment. Dealer gains are ordinary income regardless of the holding period. Frequent flippers and developers may face dealer classification. Also note: depreciation recapture is always taxed as ordinary income (at up to 25% for long-term Section 1250 property) even on long-term sales — the 0/15/20% preferential rates only apply to the gain above the recapture amount.
Frequently asked questions
How long do I have to hold a rental to get long-term capital gains rates?
More than one year from acquisition date to sale date. Exactly one year (365 days) is not enough — you need more than 365 days.
Does the holding period affect depreciation recapture?
On long-term sales, recapture is capped at 25%. On short-term sales, recapture is taxed at your full ordinary rate — potentially higher than 25% for high earners.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.