Most people own various types of capital assets. These are items used for personal purposes or investment. Some examples include houses, cars and stock. Owners of capital assets may realize a monetary gain after they sell them. The Internal Revenue Service (IRS) requires you to report any capital gains on your tax return. Here are some frequently asked questions about capital gains.
Q: How do I determine the capital gain of an asset?
- A:The capital gain is the difference you sell the asset for and your basis. The basis is your investment in the property.
Q: What's the difference between cost basis and adjusted basis?
- A:The cost basis of property is usually the amount you paid to buy it. Adjusted basis is found by adjusting the cost basis up or down to reflect the current state of the property. Capital gains or losses are usually determined by using adjusted basis instead of cost basis.
Q: What are examples of items that can increase or decrease property basis?
The basis is increased by improvements to the property. For example, a new roof or addition will increase the basis of a house. Legal fees and zoning costs can also increase property basis.
Property basis will usually go down if there's any casualty or theft loss. Easements and deductions previously allowed for amortization, depreciation and depletion will also reduce the basis of property.
Q: Can I deduct capital losses?
- A:Capital losses can't be deducted on personal use property. However, they can be deducted on investment property.
Q: How much capital losses can I deduct?
- A:You can't deduct an unlimited amount of capital losses on your tax return. You can only deduct up to $3,000 a year. You can carry over losses to the next year if you reach the deduction limit.
Q: I sold my house this year. Do I have to pay a capital gains tax?
Most people can exclude the gain from a home. However, in order to do this, you must meet the ownership and use tests. To pass the ownership test, you must have owned your house for at least 2 years during the last 5 years. The 2 years don't have to be in a row.
To pass the use test, you must have lived in the house for at least 2 years during the last 5 years. The 2 years also don't have to be in a row.
If you pass these tests, a gain up to $250,000 can be excluded. If you're married and filing jointly, you can exclude up to $500,000.
Q: I sold my house at a loss. Can I deduct this amount?
- A:No, you can't deduct the loss. It's considered a nondeductible personal loss.
Q: What tax form do I use to report capital gains?
You're required to report capital gains on Form 1040, Schedule D.
Q: Do I realize a capital gain if my stock increased in number because of a stock split?
- A:No, there's no capital gain. The monetary worth of your stock stayed the same. It only increased in number, not in value.
Q: Do I have to pay capital gains tax on property I recently sold that I had received as a gift?
Yes, you have to report any capital gains from your gift. However, the basis for the property is more difficult to determine. You have to figure out the fair market value of the property when it was given to you and the adjusted basis to the donor to know your property basis. For more details, look at IRS Publication 551, Basis of Assets.