Short-term capital gains are taxed the ordinary income tax rate. In 2013 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

Statistics show that only 7 percent of all taxpayers report capital gains in any given year, and over two-thirds of the gains reported went to people making over $100,000 a year. Most Americans own capital assets (like homes or businesses), but they sell them only a few times in their life.

As for what to do with your money when you exercise your capital gains option, you have a number of choices. Before taking any action, be sure to consult your financial advisor. Benny Kass, senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in real estate observed that property options can include:

1. Sell and pay the tax: Assume Bob paid $250,000 for his Venice 2+1, and has depreciated the property by $50,000 over the years. His basis in the property will be $200,000 ($250,000 - $50,000). If he were to sell the property for $800,000, he will have made a profit of $600,000 ($800,000 - $200,000). This does not take into account other costs and expenses which may reduce his gain - fix-up costs, closing fees, and real estate commissions. For Federal tax purposes, Bob will owe Uncle Sam $90,000 in capital gains tax (at the 15 percent rate), not including state taxes and other prizes.

When Bob’s done with the federal government, his bottom line (excluding state taxes and other expenses), will be approximately $510,000 in gross sales proceeds. Any remaining mortgage fees will have to be paid off at settlement.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your cost basis (The original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.), is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

2. Do a Like Kind exchange: under section 1031 of the Internal Revenue Code, Bob can exchange his property for another piece of property that will be equal to or more expensive than his current property, deferring his capital gains tax obligation along the way. Bob can purchase a replacement property for $600,000 or greater. However, since this is an exchange, his tax basis will be the basis of the relinquished property - i.e. $200,000.

There are strict rules applicable to 1031 exchanges. Net sales proceeds must be held by a neutral intermediary. Replacement properties must be identified within 45 days after the sale of the relinquished property. Title needs to be taken to the replacement property within 180 days after the sale of the relinquished property. 1031 exchanges are only if you want to continue on as a landlord and keep that income stream running in.

3. Installment Sale: Bob can defer - but not avoid - paying capital gains tax if he sells the property and carries back a mortgage. This is known as an "installment sale". Under this arrangement, you pay a portion of the capital gains tax as the moneys come in each year.

4. Donate the property to a charity - FYI, there are restrictions and limitations on such donations which Bob should fully understand before he decides to go this route.

5. Sell the property to a family member: Is the property worth keeping in the family? Bob can sell it to a family member, and carry back the financing. If he is concerned about estate tax issues, he can gift up to $11,000 per person per year on the outstanding balance of the moneys he is owed by his family on his property.

In layman’s terms - Bob sells the property for $800,000 to his children, and agree to carry back all of the purchase price. His lucky kids sign a promissory note in the amount of $800,000 - there will be a deed of trust (mortgage) on the property in this amount. If Bob’s two children now own the property and if Bob is married. He and his wife can gift back - tax free - $44,000 of the balance of the note each and every year. Thus, in the first year, the note balance will be reduced down to $656,000 ($800,000 - $44,000), and so on each and every year.

There are a number of ways in which you can dispose of your rental property. But talk with your family - and your financial advisors - before making any final decisions.