Capital Gains Tax
The capital gains tax is tax applied to any income that you earn as a result of the sale of an asset, such as property or investments. Property will be taxed unless that property has been your principle residence for two years or more. If you have lived in the home for more than two years, you are allowed to exclude $250,000 (or $500,000 for a married couple) of the gain.
Essentially, capital gains tax is a voluntary tax since it is only paid when an investment is sold. In order to avoid paying this tax, owners must simply hold on to their assets – known as the “lock-in effect.”
There are a few aspects to this tax law that make it unfair to those whom it affects. First, capital gains are not indexed for inflation. This means that the seller pays for both the real gain of the purchase but also the illusionary gain attributed to inflation. This is one reason why capital gains have been taxed at lower rates than “normal” income.
A second unfairness is that you are only allowed to deduct a portion of capital losses, but you must pay taxes on the full amount of capital gains.
Before making a decision about a risky real estate or investment purchase, consider how long you expect to be the owner. If you are planning to “flip” properties or trade stocks, make sure you are aware of the capital gains tax implications.
For more details about capital gains taxes, visit the IRS website at www.irs.gov. You may also want to investigate the depreciation of assets claimed after May 6, 1997.