What You Should Know About Capital Gains

What You Should Know About Capital Gains

Anyone who sells a capital asset should know that capital gains tax may apply. If you sell something for more than you received the item, then the difference is a capital gain, and you’ll need to report that gain on your taxes. Your basis is usually what you paid for the item. It includes not only the price of the item but also any other costs you had to pay to acquire it.

In addition, money spent on improvements that increase the value of the asset, such as a new addition to a building, can be added to your basis. Depreciation of an asset can reduce your basis. The single biggest asset many people have is their home, and depending on the real estate market, a homeowner might realize a huge capital gain on a sale. The good news is that the tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet three conditions. In most cases, your home is exempt.

You can find yourself exempt if you owned the home for a total of at least two years in the five-year period before the sale. Also if you used the home as your primary residence for a total of at least two years in that same five-year period or you haven't excluded the gain from another home sale in the two-year period before the sale. If you meet these conditions, you can exclude up to $250,000 of your gain if you're single, and $500,000 if you're married filing jointly.

If you sell an asset after owning it for more than a year, any gain you have is a "long-term" capital gain. If you sell an asset you've owned for a year or less, though, it's a "short-term" capital gain. How much your gain is taxed depends on how long you owned the asset before selling it.

Anyone with a lot of investment experience can tell you, that things don't always go up in value. They go down, too. If you sell something for less than its basis, you have 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, you may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in excess capital losses, the amount over $3,000 can be carried forward to future years to offset capital gains or income in those years.

You'll experience a capital gain any time you sell a capital asset for more than you initially bought it. Just about anything of value could result in a capital gain, but it most often applies to assets such as homes, investment properties, stocks, bonds, and other securities.

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