Most Important Things You Need To Understand About Capital Gains
A capital gain happens when you sell something above what you spent acquiring it. This is rampant when it comes to investments, but it can also be applicable to your 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 wealthy people
Anyone who’s interested to sell a capital asset should expect that capital gains may be applied. And as the Internal Revenue Service (IRS) states, almost everything you own is 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 an item above your “basis”, then the difference is equivalent to your capital gain, and you have to report that gain on your taxes.
Your basis is typically what you spent for the item. It includes not only the price of what you’re selling but also all the other costs you had to spend to own it – such as sales taxes, excise taxes, all sorts of fees, shipping costs, handling fee, setup costs, installation charges, and money you have spent for refurbishments to boost the value of the item.
In most cases, your house is an exempt.
The single biggest asset a lot of people have is their house, and depending on the specific real estate market, the owner of the house might realize a big capital gain on a sale. Good news is, tax code lets you exclude some, if not, all of such a gain from your capital gains tax, so long as (1) you owned the property for a total of 2 years (minimum) in the 5-year period before the sale, (2) you lived in your property as primary residence for a minimum of two years in the same 5-year period, and (3) you have not excluded the gain from a different home sale within a 2-year period before the sale.
Your business income is not a capital gain
If you are operating a business that buys and sells items, the gains from your sales will be valued and taxed as business income instead of capital gains.
Loss on capital may mean an offset on capital gains.
As anyone with sufficient investment experience would agree, value of things don’t always go up – they go down as well. So if you sell something below its basis, you get a capital loss.