If like most taxpayers you've been thinking that capital gains tax is just for the rich people, it's high time you stopped thinking in that direction. Any time you sell a capital asset such as a home (whether you bought or inherited it), the result is a capital gain or a capital loss. If you're making a loss on the sale, you need not worry about taxes. But as long as you're making a profit (which is usually the case for most sales), then you should be prepared to deal with a few tax obligations. The tax professionals at Johnson, Johnson & Associates, Inc in Yeadon, PA have rounded up several things you need to know about capital gains and capital gain tax rates.
Here are the five things to keep in mind about capital gains tax rates
The IRS defines a capital asset as property such as home, a car, or any other investment property such as stocks and bonds. Capital gains or losses are calculated by the price you paid for the property. There are long term and short term capital gains determined by how long you owned the property. If you held the property for longer than one year, then the gain is treated as long-term. For property held for less than a year (12 months), Johnson, Johnson & Associates, Inc in Yeadon, PA has found out that the gains are treated as short term. Typically, the tax bite for short term gains is significantly greater than that for long-term gains.
For investments you’ve held for less than one year, you will be faced with a higher tax rate; typically between 10 and 20 percent more than if you would have held the investment for longer. For traders, therefore, the trick is to buy and hold for at least a few years.
In some cases, as the tax experts at Johnson, Johnson & Associates, Inc in Yeadon, PA have come to find, people in the lower tax brackets may not have to pay taxes on long-term capital gains.
Ask anyone with investment experience and they will tell you that investments don't always go up in value. Sometimes, they actually go down in value. If you're selling an item for less than the basis (the price at which you bought it), then you have made a loss. Capital losses coming from investments – but not from personal property – can be used to offset capital gains. For example, if you have $50,000 in long-term gains from the sale of your stocks and make a $20,000 loss from the sale of a different set of stocks, then you can only pay taxes on $30,000 because in effect, you only gained $30,000 in your long term investment.
If your capital losses exceed the capital gains, then you’re allowed to use the loss to offset up to $3,000 of other income. Speak with the tax professionals at Johnson, Johnson & Associates, Inc in Yeadon, PA to learn more.
For most American taxpayers, the home is their biggest asset. By selling the home, depending on the prevailing market situation, the homeowner can make a huge profit or a devastating loss. If you're a homeowner, you're advised to work with a reliable real estate agent to ensure that you're making a good profit on your sale because gains from the home sale are more often than not exempt from capital gains tax.
There are certain conditions that you need to meet to qualify for the exemptions. For example, you must have owned the home for a cumulative total of two years over the five years leading up to the sale. If you lived in the home for three years, then rented it out for two years and now you want to sell, you will still qualify for the exemption.
To be eligible, you must also have used the house as your primary residence for a total of two years within the five years leading up to the sale. Lastly, you cannot exclude two or more homes within a space of two years. This means that if you get an exemption on capital gains while selling a home sale in on December 31, 2016, then you have to wait until December 31, 2018, before you can claim exemption on another home sale. Speak with Johnson, Johnson & Associates, Inc in Yeadon, PA to learn about other requirements.
To report your capital gains to the IRS for tax purposes, you need to file form 8949, Sales and Other Dispositions of Capital Assets along with your tax return. You're also required to file Schedule D, Capital Gains and Losses along with your tax return.
Johnson, Johnson & Associates, Inc in Yeadon, PA is always waiting to help. Call us today to speak with a tax professional.
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