5 Things You Should Know About Capital Gains

A capital gain occurs when you sell something for more than you spent to acquire it.  This happens a lot with investments, but it also applies to persona property as well. 

  • Capital gains aren't just for rich people.  Anyone who sells a capital asset should know that capital gains tax may apply.  And as the Internal Revenue Service points out, just about everything you own qualifies as a capital asset.  That's the case whether you bought it as an investment, such as stocks or real property, or for personal use, such as a car or a big-screen tv.
  • In most cases, your home is exempt.  The single biggest asset many people have is their home, and depending on the real estate market, a homeowner might realize a huge capital gain on a sale.  the good news is that the tax code allows you to exclude some or all of such a gain from capital gains tax, as long as you meet three conditions:
  • You owned the home for a total of at least two years in the five-year period before the sale.
  • You used the home as your primary residence for a total of at least two years in that same five-year period.
  • You haven't excluded the gain from another home sale in the two-year period before the sale.
  • Length of ownership does matter.  If you sell an asset after owning it for more than a year, any gain you have is a "long-term" capital gain.  If you sell a asset you've owned for a year or less though, it's considered a "short-term" capital gain.  And the tax bite from short-term gains is significantly larger than that from long-term gains.
  • Capital loses can offset capital gains.  As anyone with much investment experience can tell you, things don't always go up in value.  They go down, too.  If you sell something for less than its basis, you have a capital loss.  Capital losses from investments but not from the sale of personal property can be used to offset capital gains.
  • Business income isn't a capital gain.  If you operate a business that buys and sells items, you gains from such sales will be considered - and taxed as - business income rather than capital gains.  For example, many people buy items at antique stores and garage sales and then resell them in online auctions.  Do this in a businesslike manner and with the intention of making a profit, and the IRS will view it as a business.