Money gurus are always preaching long-term investing. Not only will that give you a better shot at earning more, it’ll also get you a lower tax rate when you sell.

But exactly what capital gains tax rate you pay depends on several things, including when you bought the asset, when you sold it, your overall income level and sometimes what tax-code changes are made in the meantime.

Currently, capital gains may be taxed at 5 percent, 15 percent, 25 percent or 28 percent, or a combination of rates. These tax levels are known as long-term capital gains and apply to assets that you hold for at least 366 days (more than one year).

The long-term capital gain tax generally is much lower than what you pay on your regular income.

In fact, it is a taxpayer’s income level that generally determines which capital gains rate is owed. If your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates.

And you could face yet another rate depending on the type of property you sell.

Capital gains tax rate changes
For many years, investors whose overall income put them in the top four income tax brackets faced a long-term capital gains rate of 20 percent, while lower-income investors paid capital gains taxes of 10 percent.

Tax-law changes in May 2003, however, lowered the rates by 5 percent each. Most investors, which generally means folks in the higher income ranges, now find their capital gains taxed at 15 percent. Taxpayers in lower income brackets pay only 5 percent on most investment earnings.

These lower rates were scheduled to end on Dec. 31, 2008.

However, in May 2006, lawmakers agreed to extend this tax break for investors for another two years. Now capital gains and qualified dividends will continue to be taxed at 15 percent (or 5 percent for lower-income taxpayers) through 2010.

Remember, each of these is the long-term capital gains rate. In most cases, that means you have to hold an asset for more than a year before you sell it. If you cash it in sooner, you’ll be taxed at the short-term rate, which is the same as your ordinary income tax level and could be as high as 35 percent on 2007 returns.

And while the 5 percent and 10 percent rates have received the most attention, at least on Capitol Hill, for the last few years, there are several other categories of capital gains taxes. Here’s a breakdown of all the tax levels.

5 percent rate
This capital gains rate applies to taxpayers in the 10 percent or 15 percent income tax brackets. They will pay a maximum 5 percent long-term gains rate on property held for more than a year.

Lower-income investors get an even better investment sale deal in 2008. That year, these filers will pay no tax on sales of long-term holdings. (More on this later.)

The 5 percent rate still applies to a portion of your gains even if your asset sale pushes you into a higher bracket. For example, if as a single filer your taxable income was $30,000, but you netted another $3,000 from a long-term stock sale, some of that gain would still be taxed at the lower 5 percent capital gains rate even though technically you were bumped into the 25 percent tax bracket.

In this case, $31,850 (the 2007 income ceiling for the 15-percent bracket) minus your ordinary income of $30,000 gives you a $1,850 capital gains cushion at the 5-percent level. Only the remaining $1,150 of gain would be taxed at the 15-percent rate applicable to your new, higher tax bracket.

15 percent capital gains rate
This most-widely paid capital gains tax rate applies to long-term investments by individuals in the 25 percent or higher tax brackets. When you hear “lower capital gains rate,” it generally means this level, because there are few investors with incomes low enough to qualify solely for the 5 percent rate.

25 percent capital gains rate
This rate applies to part of the gain from selling real estate you depreciated. Basically, this keeps you from getting a double tax break. The Internal Revenue Service first wants to recapture some of the tax breaks you’ve been getting via depreciation throughout the years. You’ll have to complete the work sheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, known as Section 1250 property. More details on this type of holding and its taxation are available in IRS Publication 544, Sales and other Dispositions of Assets.

28 percent capital gains rate

Two categories of capital gains are subject to this rate: small business stock and collectibles.

If you realized a gain from qualified small-business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. If you’ve already hired a tax professional to help you sort out the 25 percent rate on depreciable property, she can help you figure this tax, too. Or you can get the specifics on gains on qualified small business stock in IRS Publication 550, Investment Income and Expenses.

If your gains came from collectibles rather than a business sale, you’ll still pay the 28 percent rate. This includes proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even pricey wine or brandy collections.

Zero taxes for some in 2008
When the new year rolled around, so did a nice tax break for investors in the 10 percent and 15 percent income tax brackets. Any long-term assets they now sell will be exempt from capital gains taxes.

To qualify for the zero rate in 2008, a married couple must make no more than $65,100 in taxable income; single filers earning $32,550 or less will pay no tax on their sales of assets they’ve owned for more than a year.

While lower-income individuals aren’t typical investors, this tax benefit could help out folks such as retirees who have little or no taxable income. And the children of older individuals could combine the annual gift exclusion ($12,000 in 2008) with this capital gains break and give appreciated long-term assets to their older parents.

Mom and Dad then could sell the assets tax-free.

Don’t worry about that holding-period requirement, either. In the case of a gift, the tax law says the recipient’s holding period is the same as the donor’s.

“If I held a stock for two years and gave it to my mother, she could turn around and sell it the next day and get the long-term capital gains rate,” says Bob D. Scharin, RIA senior tax analyst from Thomson Tax & Accounting. In 2008, that would be zero.

With Congress continually tweaking investment tax laws, what’s an investor to do? Since most people will pay less taxes on their long-term gains thanks to the 2003/2006 laws, financial experts say to take advantage of today’s lower rates when they fit into your portfolio plans.

But don’t forget about the ultimate Dec. 31, 2010, deadline. And definitely keep an eye on federal tax-law writers in the interim.