Answers to Questions on Capital Gains and Losses

Jul 31, 2018

MoneyLife100Did you know that when you sell an asset – such as your home, collectables, or stocks – you may have to pay taxes on the proceeds? Knowing the rules on capital gains and losses can help you make decisions about when, or if, it makes sense to sell. The Pennsylvania Institute of Certified Public Accountants (PICPA) offers answers to some key questions. 

What Gains Are Taxable?

You may have taxable gains when you sell a capital asset, which can include your home, other property, or investments such as stocks and bonds. The capital gain is the difference between your basis (usually the purchase price you paid for the asset) and the sale price. The cost of improvements made may increase your basis in the property. In a simple example, if you paid $200,000 for your home and added on a bedroom that cost you $25,000, $225,000 would be your basis. If you later sell the house for $500,000, the $275,000 difference between your basis and the sale price is your capital gain. (Most settlement fees and closing costs can be added to your basis and most selling expenses can be subtracted from your sale price, so consult your CPA for details on determining your gain.) The basic rules are similar for other kinds of personal property. If you bought an antique chair for $1,000 and later sold it for $1,500, your taxable capital gain is $500. 

Is There a Break When I Sell My House?

The good news is that you get a large tax break on capital gains associated with the sale of your principal residence. Profits of up to $250,000 for a single filer and up to $500,000 for a married couple filing jointly may be tax free. Anything above those amounts must be reported on your income tax return as a capital gain. You can use the proceeds however you like, and the exclusion is generally available every time you sell a home, as long as you owned the home and used it as your main home during at least two of the five years before the sale. There is a different set of rules for second homes and real estate investment property, so ask your CPA for more details. 

What about Gains and Losses on Investments?

Gains on assets you’ve owned for one year or less are considered short-term gains and are taxed at your ordinary income rate, which can range from 12 percent to 37 percent. Gains on anything you’ve held longer than a year are long-term gains, and are taxed at the capital gains rate for your income bracket. For most people, that means long-term capital gains will be taxed at 15 percent. If you’ve had losses on assets, they can be applied against your gains. Let’s say that you’ve sold a portfolio of stocks and bonds. Some went up in value a total of $500 above your basis, but others went down in value by a total of $700 below your basis. In that case, you can deduct your net $200 capital loss. There is a $3,000 limit on losses in excess of gains which you deduct in any tax year, but you can carry over the excess amount to following years. Be aware, though, that you can’t deduct capital losses on personal-use property, such as your home or car. 

Your CPA Has the Answers

Each situation is unique, so contact your local CPA with any questions you have on capital gains and losses. He or she can offer advice on all your financial concerns. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.

Originally published Nov. 21, 2016
 
About PICPA

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a premiere statewide association of more than 22,000 members working in public accounting, industry, government, and education. Founded in 1897, the PICPA is the second-oldest state CPA organization in the United States.

Money & Life Tips are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.