Benjamin Franklin is often credited with originating the saying about the certainty of only two things–death and taxes. However, in a sense, one kind of tax is strictly voluntary. In its most basic form, a capital gain occurs when something is sold for more than it was acquired for, and therefore, the sale is the triggering event for the obligation to pay tax. Primior understands the issue of timing can be a major factor in mitigating the impact of capital gains tax. Other things you should know about capital gains tax include:
What qualifies as a capital asset
According to IRS regulations, a capital asset is not only stocks or real estate purchased for investment purposes but also includes personal property such as an automobile or a coin collection, for example. Personal property is typically sold at a loss, so no tax is owed. However, some people buy and sell items on a regular basis for profit. If so, the IRS may consider it business income and not a capital gain.
The basis of a capital asset
The basis of an asset is its cost to you plus other expenses such as debt obligation, sales tax, commissions, or other fees. It may also include improvements or repairs.
Your home as a capital asset
Your primary residence is a capital asset, but special rules apply. If you meet certain requirements, up to $250,000 for a single taxpayer and up to $500,000 for married taxpayers can be excluded from the taxable gain.
Period of ownership matters
If an asset is held less than a year, profits are taxed as a short-term gain. A short-term gain is classified as regular income for tax purposes and therefore taxed at the taxpayer’s tax bracket rate. Anything held longer than one year and sold for a profit is taxed as a long-term gain. Long-term capital gains tax rates are either 0%, 15%, or 20% based on income and filing status. With the current top marginal tax rate of 37% for regular income, it makes sense to employ the buy and hold philosophy for at least a one year period to avoid a short-term capital gain.
Losses can offset gains under certain conditions. Although you are required to pay taxes on gains of personal property, you are only allowed to offset losses on items purchased for investment purposes. You can offset short-term losses from long-term losses and vice versa but only after combining all short-term and long-term investments into their respective categories and arriving at a net gain or loss for each.
Maximizing your return on investment involves many factors including capital gains tax. The Primior Asset Management team has a proven performance record, and we would be happy to explore with you your investment goals.