Capital gains tax…isn’t that just for rich folks, you say? Well, consider this: just about everything you own is a capital asset (investments like stocks, real estate, coins, fine art, or personal property like real estate, your car, jewelry and that big-screen TV). And if you sell a capital asset, capital gains taxes may apply to you – rich or not. So, here are some key things to know about capital gains taxes.
- When you sell a capital asset for more than your “basis”, the difference is a capital gain and it must be reported on your tax return using Schedule D.
- The rate of tax you pay on the gain depends on how long you owned it. Less than one year = short-term gain (taxed at same rate as ordinary income); more than one year = long term gain (taxed at lower rates – for 2014, 0%, 15% or 20%). So, no quick flipping!
- Capital gains are subject to state taxes as well. Most states tax capital gains as ordinary income, though, so you don’t get a break there.
- Selling some assets (those stocks that are tanking, for instance) at a loss during the first year of ownership can help off-set gains on other capital assets. (And, you can carry over losses for up to seven years.)
- If your losses exceed your gains, you can use the excess loss to reduce other income on your return (up to $3000).
In addition, here are two really special cases to keep in mind: 1) in most cases the profit from the sale of your primary home is exempt (if you owned it and lived in it for 2 of the last 5 years), and 2) if you plan to sell stock and donate your profit to charity – don’t! Give the appreciated stock directly to the charity, and avoid paying capital gains tax, too. A great win-win!
As always, consult a tax advisor or financial planner for the best advice, especially if you have multiple and complex capital assets.