Capital Gains Tax

Capital Gains Tax is a tax which is imposed on the profits you receive from investments. These profits, or capital gains, are subject to IRS tax regulations and must be claimed as income on your income tax return. Capital gains are subject to different tax rates depending on a number of factors.

Capital Gains Tax Rate

Unlike regular income, the amount of tax you pay on capital gains depends on the amount of time you owned the underlying investment. When you sell an investment for more than you paid for it, you realize a capital gain. For investments you have held for less than one year, (short term) capital gains are taxed at the same rate as your income. For investments held longer than one year (long term), a flat tax rate of 15% applies. In most cases, your regular tax rate is higher than 15%. This tax rate schedule is designed to allow you to save money on your capital gains taxes by investing for the longer term. Long term investing is generally believed to be best for individual investors and the overall economy.

Real Estate Capital Gains Tax

In addition to financial investments, selling real estate can also result in capital gains. It is good to understand how real estate capital gains can affect your tax situation. When you sell your home, you are generally responsible for paying capital gains tax on the amount of profit you realize (the difference between what you paid for the house and what you sold it for). When it comes to real estate, there are some ways around this tax. Special rules concerning the length of time you owned the property do exist. If you own and have lived in your home for two of the last five years, you can exclude up to $500,000 of capital gains (depending on your filing status). If, however, you sell your home within one year of purchasing it, any profit you gain is considered a short term capital gain and is taxed at 15%.

Avoiding Capital Gains Tax

There are ways to eliminate or reduce the amount of tax you must pay on capital gains. Gifting and certain methods of repurchase can limit your tax liability. Any such attempts should be made with the help of an accountant or tax specialist. Tax law is complex and in order to avoid problems with your return, it is best to have the assistance of a trained tax professional.