The term “capital gains” often brings fear to the mind of the taxpayer. The definition of a capital gain is simply any asset that is worth more when you sell it than when you bought it. According to capital gains tax law, we typically owe taxes on the difference between the price we paid and the price we sold the asset for. If we sell an asset for less than we paid for it, it’s called a capital loss, and the loss becomes a tax deduction. Capital gains can be realized on real property assets like real estate or on items like stocks and bonds.
According to capital gains tax law, however, there are times when we can avoid paying the capital gains tax, even if we made a profit when selling our asset. The most common way to avoid capital gains tax law is when selling real estate. Real estate is typically a very profitable investment; it hardly ever depreciates during the time you hold it. And, the IRS has made it easier for tax payers to invest in real estate without having to pay large taxes on real estate profits.
According to capital gains tax law, if you sell your primary residence, you are exempt from capital gains tax as long as your profit is not more than $250,000 if you’re single; twice that if you’re married. So, when you sell your home, you needn’t worry about capital gains taxes unless your profit is huge. And, if your profit is more than $250/500,000, you only pay capital gains tax on the amount over the $250/500,000.
If you own a piece of rental property that you’d like to sell, you can call it your primary residence according to capital gains tax law if you lived in it at least two out of the five years just prior to selling it. Many real estate investors use this clause to avoid ever paying capital gains taxes on real estate. They simply live in each of their rental properties for the last two years before they’re ready to put it on the market.
According to capital gains tax law, there is also a way to avoid paying capital gains tax on real estate that is not your primary residence without living in it. Simply invest the profits you made into another piece of real estate within two years and you don’t pay capital gains tax.
You’ll also pay capital gains tax on stocks that you sell if they’re worth more when you sell them than when you bought them. If you hold the stock for 5 years or more before you sell it, and your capital gains tax may be only 15%, however, as opposed to the 30% you’ll pay if you hold it less than 5 years. If you have further questions about how capital gains tax law will affect you this year, consult your tax professional.