A Helpful Overview of Capital Gains Taxes
A capital gain tax in incurred on profit made when an investor sells almost any type of property. While houses, boats and vehicles are included under the capital gains tax, so to, are items such as furniture and sporting equipment. Basically, any item that is sold for a profit, must be counted toward an individuals capital gain tax. However, a loss on many items, cannot be deducted from profit that is consider capital gain. Items such as houses, stocks and bonds, can be counted as a loss towards a capital gain tax.
In fact, those items can be counted toward a loss indefinitely. For example, a person that deducts the maximum loss for a year, can carry over that loss to offset any capital gains in the following years. Short term investments are taxed at a higher rate than long term investments. However, short term losses can help offset the higher taxes on short term capital gains. In addition, long term losses can help to offset capital gain taxes on long term profits from investments.
Any losses can be carried over and can be used indefinitely to offset capital gains, or even regular income, until the full amount of a loss has been deducted from taxes. Investors often search for ways to avoid, or defer capital gain taxes. There are many strategies and smart investors will learn those strategies before selling any property.
For investors that wish to utilize these strategies, they must follow specific and strict rules, which is impossible once the sale has already been completed. Recent changes in tax laws are likely to increase capital gain tax rates, unless a new Act is passed soon.
Investors can defer capital gains taxes in very specific circumstances. A business owner that sells a building, may defer capital gain taxes if they buy a similar property within one hundred and eighty days of the date of sale. However, investors must use the entire profit from the previous sale to purchase the new property, of they do not qualify for deferment under this tax rule. There are a list of other factors that can effect an investors ability to defer capital gains taxes utilizing this tax rule.
For each investor, there are a different set of rules that may apply in order to allow them to deffer paying a capital gains tax. In addition, there are many ways that investors can reduce their capital gain tax rate. Profit made form long term investments, rather than short term investments, is taxed at a lower rate. In additional investors should be sure that they deduct capital losses from capital gains. Although investors may meet the maximum capital loss deduction in a given year, they can carry over additional losses into future years. Capital losses can be deducted indefinitely, until the full amount has been deducted.
There are a number of deferment strategies available to investors that are facing taxes on capital gains. First, investors must always remember to keep accurate records regarding all capital losses, as they can be deducted from any capital gains. In addition, business owners that sell a property, can avoid paying a capital gain tax if they purchase a similar property in the immediate future.
However, every dollar earned from the original property, must be invested in the new property in order for an investor to avoid the capital gain tax. There are also simple methods of voiding capital gain taxes, such as avoiding the sale of items for profit. However, for many, that option is not realistic. Investors can reduce their capital gains tax by donating money to charity, or by subtracting any capital losses incurred.
There are many criticisms about the capital gain tax. There are rules that regulate which items can be considered under capital gains and losses. Many items that are considered under capital gains, can not be deducted under capital losses. In other words, the profit from a sale of items that is considered under a capital gain, may not necessarily be allowed to be deducted under a capital loss. For example, an individual that sells a piece of furniture for more than they paid, must count that profit under capital gains.
Yet, that same item sold for a loss, can not be deducted as a capital losses. Only certain items, such as stocks, qualify under both capital gains and capital losses. In addition, tax laws do not take inflation into consideration for the rates that apply to capital gains taxes. For investments that are very long term, the rates are no different than an individual that invested for five years. Obviously, a home that is owned for twenty years, is likely to have increased in value more than one held for five years.
Most of the increase in value is based simply on inflation. The rate of inflation is not considered under capital gain tax rules, and the consumer pays the same tax rate that would apply to a homeowner that made a profit after only five years, which would likely not be based on inflation.
Recent Attention and Changes:
There are many changes set to take effect on tax laws, including the capital gains tax rate. The Taxpayer Relief Act and the Tax Reconciliation Act, are both set to expire. Although a sunset provision allowed continued tax relief, that relief is set to expire in 2010. With that expiration, some individuals may enjoy tax breaks. For example, the inheritance tax is set to expire if no provisions are made.
Yet, many people believe that the federal government will not allow that lapse to occur. When inheritance tax is addressed, it is likely that the capital gains tax will also be addressed. Although, it is not known if those taxes would be lowered, or stay on the course that allows those tax rates to rise. Currently, the capital gains tax rate is set to match that which was in existence before the Taxpayer Relief Act went into effect.