Business property that is held for one year or less is considered to be held on a short-term basis. If you sell, scrap, retire, or otherwise dispose of a short-term capital asset, any related gains will be taxed at your ordinary income tax rate.

However, if the property was held for more than one year, gains on it will generally be treated as long-term capital gains. While property used in a trade or business is technically not a "capital asset," in the IRS's view, the tax laws do apply the more favorable capital gains tax rates to this property.

For assets that are held over a year, the maximum capital gains tax rate that applies to assets sold in 2001 is generally 20 percent (10 percent for taxpayers in the 15 percent tax bracket). Beginning in 2001, long-term capital gains property that has been held for more than five years will be taxed at a maximum rate of 18 percent (8 percent for taxpayers in the 15 percent bracket).

The special 18 percent rate will apply only to property first put into service after 2000, except that for taxpayers in the 15 percent tax bracket, the special 8 percent rate applies to property first put into service after 1995. Taxpayers who already hold assets used in a trade or business on January 1, 2001 and dispose of the assets in 2002 may elect to take advantage of the special 18 percent rate for five-year property. At the end of 2000, Congress eliminated a perceived loophole related to this election by making the election ineffective for assets sold in 2001.

Exceptions to capital gains treatment. An important exception to the special rate for capital gains is any gain that represents recaptured depreciation. Also, in some cases sales to close family members or controlled business entities might not be eligible for capital gains treatment, or for deduction of a capital loss.