CHANGES FOR 1998...

Elimination of 18-month holding period for lowest capital gains rates. Beginning in 1998, you no longer have to hold property for more than 18 months to be eligible for the lowest capital gains rates. Now, in most cases, you only have to hold property more than 1 year to be eligible for the 10% or 20% tax rate.
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INFORMATION RETURN...

Form 1099-S. An information return must be provided on certain real estate transactions. Generally, the person responsible for closing the transaction must report on Form 1099-S sales or exchanges of the following types of property.

1. Land (improved or unimproved), including air space.

2. An inherently permanent structure, including any residential, commercial, or industrial building.

3. A condominium unit and its appurtenant fixtures and common elements (including land).

4. Stock in a cooperative housing corporation.

If you sold or exchanged the above types of property, the reporting person must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S.

If you receive or will receive property or services in addition to gross proceeds (cash or notes) in this transaction, the person reporting it does not have to value that property or those services. In that case, the gross proceeds reported on Form 1099-S will be less than the sales price of the property you sold. Figure any gain or loss according to the sales price, which is the total amount you realized on the transaction.
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HOLDING PERIOD...

Real property. To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership.

However, taking possession of real property under an option agreement is not enough to start the holding period. The holding period cannot start until there is an actual contract of sale. The holding period of the seller cannot end before that time.
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Maximum Tax Rates on Net Capital Gain

The 31%, 36%, and 39.6% income tax rates for individuals do not apply to a net capital gain. In most cases, the 15% and 28% rates do not apply either. Instead, your net capital gain is taxed at a lower maximum rate.

Net capital gain is the excess of net long-term capital gain for the year over the net short-term capital loss for the year.

You will need to use Part IV of Schedule D (Form 1040) to figure your tax using the maximum capital gains rates if both of the following are true.

1. Both lines 16 and 17 of Schedule D are gains.

2. Your taxable income on Form 1040, line 39, is more than zero.

The maximum rate may be 10%, 20%, 25%, or 28%, or a combination of those rates, as shown in Table 4-3.
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Using the maximum rates. 

The part of a net capital gain that is subject to each maximum rate is determined by first netting long-term capital gains with long-term capital losses in the following tax rate groups.

1. A 28% group, consisting of:

   1. Collectibles gains and losses,

   2. Section 1202 gain equal to the section 1202 exclusion, and

   3. Any long-term capital loss carryover.

2. A 25% group, consisting of unrecaptured section 1250 gain.

3. A 20% group, consisting of gains and losses not in the 28% or 25% group.

If any group has a net loss, the following rules apply.

• A net loss from the 28% group reduces any gain from the 25% group, and then any net gain from the 20% group.

• A net loss from the 20% group reduces any net gain from the 28% group, and then any gain from the 25% group.

If you have a net short-term capital loss, it reduces any net gain from the 28% group, then any gain from the 25% group, and finally any net gain from the 20% group.

The resulting net gain (if any) from each group is subject to the maximum tax rate for that group. (The 10% maximum rate applies to a net gain from the 20% group to the extent that, if there were no maximum capital gains rates, the net capital gain would be taxed at the 15% regular tax rate.)
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Changes after 2000. 

After 2000, there will be changes to the maximum capital gains rates.

2001. Beginning in 2001, the 10% maximum capital gains rate will be lowered to 8% for "qualified 5-year gain."

2006. Beginning in 2006, the 20% maximum capital gains rate will be lowered to 18% for qualified 5-year gain from property with a holding period that begins after 2000.
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Qualified 5-year gain. 

This is long-term capital gain from the sale of property you held for more than 5 years that would otherwise be subject to the 10% or 20% maximum capital gains rate.
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Net capital gain from disposition of investment property. 

If you elect to include any part of a net capital gain from a disposition of investment property in investment income for figuring your investment interest deduction, you must reduce the net capital gain eligible for the maximum tax rates by the same amount. You make this election on Form 4952, Investment Interest Expense Deduction, line 4e. For information on making this election, see the instructions to Form 4952.
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Investing in DC Zone assets. 

Beginning in 2003, investments in District of Columbia Enterprise Zone (DC Zone) assets held more than 5 years will qualify for a special tax benefit. If you sell or exchange a DC Zone asset at a gain, you will not have to include any qualified capital gain in your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.
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Dispositions of U.S. real property interests by foreign persons. 

If you are a foreign person or firm and you sell or otherwise dispose of a U.S. real property interest, the buyer (or other transferee) may have to withhold income tax on the amount you receive for the property (including cash, fair market value of other property, and any assumed liability). Corporations, partnerships, trusts, and estates may also have to withhold on certain U.S. real property interests they distribute to you. You must report these dispositions and distributions and any income tax withheld on your U.S. income tax return.
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