How Do You Understand Capital Gains Tax?
• Know what is considered a capital asset. The IRS considers anything that you own and use for personal and investment purposes to be a capital asset, subject to the capital gains tax. • Know when to pay your capital gains tax. No capital gains tax is paid until an asset is “realized,” or sold. If your home or stocks increase in value but you are not selling them, you do not have to consider capital gains tax yet. • Report all your capital gains on your federal income tax forms for the year the assets were sold. Use Schedule D and report the total on your 1040. • Use your homeowner tax breaks. The Taxpayer Relief Act of 1997 allows married couples filing jointly to exclude $500,000 in capital gains when they sell their primary residence that they lived in for at least 2 out of the previous 5 years. • Exclude up to $250,000 from the sale of your primary residence if you file as a single individual. • Determine if your capital gain is long term or short term. • Classify your capital gain
