A capital gain occurs when you sell something for more than you bought it for. For instance, if you bought a car for $3,500 and sold it for $3,750, you have a capital gain—and you will be taxed on it! Here are 4 things you need to know about capital gains tax:
1. Capital gains are not just for wealthy people.
The IRS says almost everything you own is a capital asset whether you bought a property, car or a TV. If you sell that asset for more than you bought it for, you’ll need to report that gain on your taxes. Make sure you include not only the price of the asset, but any other costs associated in acquiring it, including: sales tax, shipping & handling and installation fees.
2. In most cases, your home is exempt.
Most people’s biggest asset is their home. The tax code allows you to exclude some or all gain from capital gains tax, so long as you meet these 3 conditions:
- You’ve owned your home for at least 2 years in the 5-year period before the sale.
- The home was your primary residence for at least 2 years in that same 5-year period.
- You haven’t excluded the gain from another home sale in the two-year period before the sale.
If you meet these conditions, you can exclude up to $250,000 of your gain if you’re single, $500,000 if you’re married filing jointly.
3. Business income isn’t capital gain.
If you own or operate a business that buys and sells items, your gains will be considered as business income, NOT capital gains. If you bought a couch at an antique store to upsell personally, that’s a capital gain. But, if you bought the same couch to resell at your antique store, that’s business. Buying items in a businesslike manner with the intention of making profit is a business expense, not a capital gain.
4. Capital losses can offset capital gains.
If you sell something for less than what you paid for it, you have a capital loss. These losses come from investments and can offset capital gains. For instance, if you bought a flat-screen TV for $3,000 and sold it for $2,500, you have a capital loss and can report it. If you have more than $3,000 in capital losses, the excess can be carried forward to offset your income.
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