5 Lessons Learned: Taxes

Most Important Things You Need To Understand About Capital Gains

A capital gain occurs when you are selling something for more than you have actually spent for it. This occurs a lot with investments, but it also applies to personal property. You can purchase a car for $5,000 and resell it a week or two later at $7,000 – giving you $2,000 worth of capital gain. And although the concept is pretty straightforward, and made even simpler by capital gain tax calculators, it still is advisable for every tax payer to learn a few basic facts about capital gains taxes.

Capital gains aren’t just for the rich

Anyone who’s interested to sell a capital asset should expect that capital gains may be applied. And according to the Internal Revenue Service (IRS), just about everything you possess can be qualified as a capital asset. That’s the case whether an investment was bought, such as property or stocks, or for personal stuff like your car or your huge flat screen TV.

If you sell something above your “basis”, you get your capital gain from the difference and you are required to report your gains on your taxes.

The basis is basically the amount you paid for the item. It involves not only the price of what you’re selling but also any other costs you had to pay to get it -including, but not limited to sales taxes, excise taxes, and other fees, handling or shipping costs, setup or installation charges, money you spent for improvements to boost its value.

Most of the time, you home is an exemption.

Your home, just as for many people, is the single biggest asset you have, and depending on the real estate market, you might realize a large capital gain if you put it on sale. It’s good though that tax code will let you exclude some, if not, all of this sort of gain from your capital gains tax, as long as (1) you owned the property for a minimum of 2 years within the 5-year period before its sale, (2) it’s been your primary residence for a minimum of two years within the same 5-year period, and (3) you haven’t excluded the gain from another home sale within a two-year period prior to the sale.

Your business income is not part of your capital gain.

If you own a business that involves buying and selling items, your gains from sales will be tagged and taxed as business income and not capital gains.

Loss on capital may mean an offset on capital gains.

Anyone with enough investment experience would agree that things don’t always rise in value – sometimes, they flunk. So if you sell something less than its basis price, then capital loss happens instead.

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