A capital gain occurs when you transfer or sell a piece of property for more than its acquisition cost. To be more succinct, it’s the profit realized on the sale of a non-inventory asset. Capital gains are realized from the sale of all types of property, both real and personal such as investments and other traditional non-investment types of personal property. In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains.
Almost everything you own qualifies as a capital asset, whether you bought it for personal use or as an investment. If you sell something for more than your “basis” in the item, then the difference is a capital gain, and you’ll need to report that gain on your returns. Your basis is usually what you paid for the item and includes the price of the item but also any other costs paid to acquire it, including:
- Sales taxes, excise taxes and other taxes and fees
- Shipping and handling costs
- Installation and setup charges
In addition, money spent on improvements that increase the value of the asset like a new addition to a building, can be added to your basis while an asset’s depreciation reduces your basis.
The single biggest asset owned by most taxpayers is their home. A home sale may yield a large capital gain when sold. However, the Internal Revenue Code allows taxpayers to exclude some or all of this type of gain from capital gains tax, as long as three conditions are met:
- The taxpayer owned the home for a total of at least two years in the five-year period before the sale.
- The home was used as your primary residence for a total of at least two years in that same five-year period.
- The gain hasn’t been excluded from another home sale in the two-year period before the sale.
If these conditions are met, an exclusion of up to $250,000 of your gain may be taken if you’re single, $500,000 if you’re married and filing your return jointly.
Assets sold after being owned for more than a year are “long-term” capital gains. If an asset you’ve owned for less than a year is sold, it’s a “short-term” capital gain. Taxes from short-term gains are significantly larger than those from long-term gains, often 10 to 20 percent more, and sometimes even higher. Taxpayers in the lowest tax brackets usually don’t have to pay any tax on long-term capital gains. Thus, the difference between whether an asset is short or long term may be the difference between paying some tax and no tax.
Assets also decrease in value. If you sell a piece of property for less than its basis, you have incurred a capital loss. Capital losses from investments, but not from the sale of personal property, can be used to offset capital gains. If capital losses exceed capital gains, a taxpayer may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in capital losses, the excess can be carried forward to future years to offset future income.
Taxpayers that operate a business that buys and sells inventory or other items have their gains taxed as business income rather than as a capital gain. Payments for items is a business expense, payment in return is business revenue with the difference treated as income, subject to the same taxes as income from employment.
The capital gains tax rate stayed the same in 2015 as it was in 2014. Regarding short-term capital gains, the tax rate will be the same as your income tax rate, and range between 10% and 39.6%.
However, long-term capital gains are taxed at a rate of 0%, 15%, or 20%, depending on the marginal tax bracket which applies to you. Taxpayers in the 10% or 15% marginal tax bracket will typically pay no long-term capital gains tax while most taxpayers will pay a 15% long-term capital gains tax. The 20% tax rate only applies to taxpayers that fall into the highest marginal tax bracket of 39.6%.
It is important that upon incurring any capital gain or loss or foresee one coming up, you consult with an experienced and knowledgeable tax attorney to determine the correct amount of gain or loss. Call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
