Looking On The Bright Side of Exchanges

The Mystery of Capital Gains Tax

If you’re selling any capital asset, you should know that you may be subject to capital gains tax. And as the Internal Revenue Service says, almost every property you have may be considered a capital asset, whether you bought it as an investment, like real estate or stocks, or for personal use, such as your car or home theater equipment.

If you sell something for an amount that exceeds your “basis” for that item, then the rest is a capital gain and it must be reported as such on your taxes. Your basis is what you spent to get the item, including sales, excise and other taxes and fees, as well as charges for shipping and handling fees, and installation and setup. Also, all expenses you paid for the improvement of an asset, which led to an increase in its value (for example, renovating your rental property), may count towards your basis. Using the same principle, asset depreciation reduces your basis.

More often than not, a taxpayer’s home will be exempt from capital gains tax. The biggest asset people usually have is their home, and depending on market conditions, they can make a huge capital gain when they sell it. The good news is you can exclude a part or even all of such a gain from the capital gains tax, provided the following conditions are met:

> You owned the property and used it as your primary residence for at least two years within the five-year period prior to the sale; and

> You haven’t excluded the gain from a previous home sale occurring within two years before the latest sale.

If these conditions are actually met, you can have up to $250,000 excluded from your gain if you’re unmarried and $500,000 if you’re married and filing jointly with your spouse.

How Length of Ownership Matters

Selling an asset you have owned for over a year, your gain will be considered a “long-term” capital gain. If the asset has only been your property for less than a year, it is called a “short-term” capital gain. And taxes for short-term gains are substantially higher than those for long-term gains. The capital gains tax rate on investments you’ve had for less than a year is higher – usually from 10% to 20% or even more.

This tax treatment is one of the best advantages of a “buy-and-hold” investment technique, compared to that which requires frequent buying and selling (for instance, day trading). Also, taxpayers in the bottom brackets typically don’t have to pay taxes on long-term capital gains. Hence, the difference between short-term and long-term capital gains could actually mean to pay taxes or not to pay any taxes.

Capital Losses Offsetting Capital Gains

Selling an asset for lower than its basis produces capital loss. However, only investment capital losses may be used to offset capital gains, and not capital losses from a personal property sale.

Citation: http://www.icewebfilter.com/