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As tax season approaches, read this primer on capital gains

by | Jan 1, 2020 | Blog, Mortgage & Finance

Did you sell a substantial asset last year? As we near tax season, it’s important to understand the tax consequences that result when gains occur.

First, let’s define our terms. “As the Internal Revenue Service points out, just about everything you own qualifies as a capital asset,” according to Intuit Turbo Tax. This can apply to stocks, property, even cars. If you sell them for more than what you paid—called the “basis”—the difference between the “basis” and the selling price is a “capital gain.”

The basis for the item includes any taxes and fees, shipping and handling costs and installation or setup charges accrued when acquiring the item. “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,” notes Turbo Tax.

The longer you’ve owned the asset, the lower the capital gains tax. If you’ve owned an item for more than a year, the gains you reap are called “long-term” capital gains. If you’ve owned it for a year or less and sell, those gains are “short term.” Taxes on short-term gains are generally 10-20% higher than on long-term gains.

Losses also figure into the equation. If you sell an asset for less than you paid, this is called a “capital loss” and can help offset capital gains on another item.

When it comes to the sale of your home, most people can avoid capital gains taxes. Single people can exclude $250,000 of any gains, and married couples who file jointly can exclude $500,000, provided they meet these 3 conditions:

  • They owned the home for at least two of the five years prior to selling.
  • The home was used as a primary residence for a total of two years in the five years prior to sale.
  • They haven’t already taken the exclusion from the sale of another home in the two years prior to sale.

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