4 Things You Need to Know About Capital Gains Tax

Throughout the year, we all make decisions that could either positively or negatively impact our tax status the following spring. Capital gains tax is certainly one of those areas that can surprise you. Any time that you sell certain items and make a profit, you could trigger capital gains tax, even if you didn’t view that item as an investment.

If that fact surprised you, here are four more things you should know about capital gains tax.

Length of ownership makes a difference in the type of capital gains tax you pay. Once you have owned an item for longer than a year, selling it can trigger a “long term capital gains tax”. Before that one-year mark, sale of that item will count as a “short term capital gain”. Since taxes on short term gains are generally much less than those on long term gains, you should keep that in mind when deciding whether to keep or sell an investment this year.

Your home might be exempt from capital gains taxes. The sale of your home could count as a capital gain. But you can exclude up to $250,000 (if you’re single) or $500,000 (if you’re married filing jointly) of profit from the sale of your home if you meet these three conditions:

• You owned the home for two years or more
• You used the home as your primary residence for at least two years in the five-year period prior to the sale
• You haven’t excluded gains from the sale of another home within two years

That third rule is particularly important. In some cases it might make sense to delay selling your home, if it helps you exclude profits from capital gains taxation.

Business income does not count as a capital gain. If part of your business operation involves buying and selling items (such as expensive equipment or heavy machinery), then profits from those sales are taxed as business income, not capital gains.

Losses can offset gains. Sometimes the value of an item or investment decreases over time. You can count these losses on your taxes, and often your losses can match or exceed the gains.

As with all financial matters, buying and selling investments or even expensive personal items requires careful forethought. Call us if you have any questions, and we can help you plan for a sound financial future.