Capital Gains
A capital gain is the profit made when an asset is sold. For tax purposes, that profit counts as income. For individual taxpayers, typical capital gains include selling a home, real estate or stocks. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset - such as stocks - the difference between the amounts you sell it for and what you paid for it is a capital gain or a capital loss.
Capital gains and losses are either long-term or short-term. If you hold an asset for more than one year, your capital gain or loss is long-term. If you hold the asset for one year or less, your capital gain or loss is short-term. Short-term capital gains are taxed at your current tax rate, while long-term capital gains are taxed anywhere between 5 and 28 percent.
My wife and I sold our house at a profit of $100,000. How much of this is taxed?
None of the profit is taxed because you are not required to report capital gains less than $500,000 ($250,000 for a single taxpayer) for the sale of your personal residence.
TIP: A taxpayer can use the residential capital gains provision for only one property at a time and one sale every two years.
TIP: For an extensive explanation of the residential exclusion and examples of several scenarios, go to IRS publication 523 at www.irs.gov/publications/p523/ar02.html#d0e1901.
My wife and I bought and remodeled a home during the year. We made a $50,000 profit. Is the profit taxed?
Yes. The home does not qualify as a residence. To avoid a capital gains tax for a residential sale you must have lived in the home for at least 2 years (out of the previous 5 years) as your main residence.
SIDEBAR: The length of time the taxpayer lives in the home is the ownership test. Whether or not the home was used as the taxpayer's primary residence (as opposed to a lake house), is the use test. Both tests must be met in order to avoid the capital gains tax.
Can I deduct capital gains losses?
While the IRS requires you to report all capital gains, you can deduct only your capital losses on investment property, not personal property. Currently, you can deduct up to $3,000 of capital losses annually ($1,500 if married and filing separately).