What are capital assets, gains and losses? How do I figure them out?
As you work your way through the tax complications of investments including savings, stocks, bonds and real estate it’s important to get a handle on these assets.
There are many accounting terms for different types of assets. For example, capital assets are one type of asset. There are also other types of assets, many of which are exclusive to businesses, such as fixed assets (buildings and equipment), , intangible (like licenses and contracts), and current (assets that expire in a year). Most individual taxpayers will only ever need to be concerned with one or two types of these assets, and for the purposes of this article, we are going to focus on capital assets.
In this instance, the term “capital” is meant to describe ownership of property, financial investments (such as stocks, bonds or funds) and other tangible (i.e. physical) assets. A home can be considered a capital asset, as well as a car, furnishings or even collectables you may own. It is simply property that you own that has a useful life of longer than a year and is not purchased to be flipped for a profit or a loss when owned for less than a year. For more on what is and what is not considered a capital asset, please review the Tax Topic 409 on the IRS website.
Now for many taxpayers much of their “wealth” is tied to the home, which they own. When you sell a home that has been your primary residence, there is a possibility that it may have increased in value. Not only were you purchasing a roof over your head and four walls for shelter, but the possibility, that in time, as the house increased in value, you would be able to sell it at a profit. When you are able to sell any capital asset for a profit in a given tax year, you are responsible for paying taxes on the capital gain or appreciation in that asset.
The first step in estimating a capital gain to figure out what your tax will be is to figure out the difference between what you paid for a property and what you sold it for. This is only for property you have owned for more than one year. Commissions or fees must be calculated for in the following way: The purchase price of the house plus any commissions or fees when you purchased it – must be added together. Then figure out the sales price plus any commissions or fees you had to pay when you sold the house. Subtract the price you paid from the price you received after paying your fees and this difference is either a capital gain or a loss.
Assuming you have a gain, then you must apply the long-term Capital Gain rate from the most recent tax year information– to your income and fill out a Schedule D.
In some instances, after a sale, you will receive a tax forms with information regarding the sales price. If it is a home, you may receive a 1099-S form, if it is a stock or other financial asset you may receive a
1099-B.
Unfortunately, not every sale of property will result in a capital gain. You may have had to sell your asset at a loss. Without getting into Short Sales and Foreclosures and their tax implications – be advised that the only way you can obtain a deduction on losses from the sale of a property is if you have converted it to a rental before selling it. At that point it is treated more like a business or an investment property, by the IRS.
There are special cases where you can exclude the sale of your home, particularly if you have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. For more on this, please see our article here: https://www.e-file.com/help/home-gains-exclusion.php