If You Think You Get Exchanges, Then This Might Change Your Mind

Capital Gains Tax: Unmasking the Mystery

If you’re selling any capital asset, you should know that you may be subject to capital gains tax. And the Internal Revenue Service says nearly everything you own is counted as a capital asset, whether you purchased it for personal consumption (for example, your car or your flat screen TV) or as an investment (for example, stocks or real estate).

If you sell a property for an amount that is more than your “basis” for that item, then the excess is a capital gain, and you have to report it 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, if you paid to improve an asset and increase its value (for instance, renovating the bathroom in your rental property), those expenses can be added to your basis. Based on the same principle, asset depreciation can lower your basis.

More often than not, a taxpayer’s home will be exempt from capital gains tax. Most people have their home as their single biggest asset, and if they sell it, they can make a big capital gain, depending on the condition of the market. The good news is some or even all of it may be excluded from the capital gains tax, so long as these conditions are met:

> You were the owner of the property and using it as your primary residence for a minimum of two years within the five-year period before the sale was made; and

> You haven’t excluded the gain from a past home sale that happened with two years prior to the latest sale.

If such conditions are indeed met, you will be able to exclude up to $250,000 from your gain as an unmarried taxpayer, or up to $500,000 if you’re married and filing jointly.

How Length of Ownership Matters

If you have owned the asset your selling for more than a year, any gain you make is considered a “long-term” capital gain. If your length of ownership is less than a year, it is considered a “short-term” capital gain. And taxes on short-term gains are drastically higher than those on long-term gains. If you’ve held an investment for barely a year, the capital gains tax rate is often higher – probably between 10% and 20% or even more.

This difference in tax treatment is one of the advantages a “buy-and-hold” investment technique has over investment strategies that call for constant buying and selling (for example, day trading). Also, taxpayers in the bottom brackets typically don’t have to pay taxes on long-term capital gains. Therefore, the difference between short and long-term capital gains can actually mean you have to pay taxes or not pay taxes at all.

Capital Losses Offsetting Capital Gains

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

Source: http://www.myprivacysecrets.com/investing/technology_and_real_estate.html