You might be surprised to learn that the capital gains tax does not only apply to profits from the sale of stocks and bonds or real estate. If you’ve sold a personal asset like a car, a boat or a big screen tv this year, you will most likely owe a capital gains tax on that income. There is a simple formula for determining how much you owe based on the profit you made from the sale of the asset.
Understanding Your Basis
To determine the amount of capital you have gained on the sale of an asset you must first determine your basis. Your basis is the amount you paid for an asset. The profit, or amount of taxable gains, you made on the sale of the asset is calculated by subtracting the basis from the sale price. Think of it as subtracting your expenses from revenues to determine the profits of a business.
Revenues – Expenses = Profits
When calculating capital gains:
Sale price – Basis = Taxable Gains
A “Step-up basis” is an adjustment made to the basis in the case of inheritance. In this scenario, the basis is “stepped up” to the market value of the asset on the date that the original owner passes away. In other words, if you inherit a property from a deceased parent, the value of the property on the day he or she passed is your basis. If you decide to sell the property you do not need to consider the price he or she originally paid or the appreciation during their life. You only need to account for the appreciation while you were the owner.
Selling Your Home
The IRS recognizes that for most American families, their home is their most valuable asset. As such, there are special exceptions for selling your home that allow you to exclude up to $250,000 if you are single and $500,000 for married couples from the amount of taxable capital gains. For these exclusions to apply you must own the home and use it as your primary residence for two years in the five-year period prior to the sale. It does not apply if you have excluded the gain from the sale of another home in within two years of the sale.
If you have any questions around calculating your capital gains tax or navigating inheritance tax issues contact the Miles Tax and Advisory team. Our financial experts can review your individual situation and provide you with a comprehensive tax planning strategy. Please feel free to give us a call at 410-685-1406 or by email at firstname.lastname@example.org.