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Capital Gain Tax
Capital Gains Tax (CGT) is applicable whenever you sell or otherwise dispose of (e.g. lease, exchange or lose) an asset. Broadly speaking, assets are everything you own and use for personal purposes, pleasure, or investment, including stocks and bonds held in personal accounts, household furnishings, a car used for pleasure or commuting, coin or stamp collections, gems, jewelry, gold, silver and any other collectibles.
Since 1 997, a portion of a gain made on the sale of your principal home has been excluded from CGT, so homeowners can avoid tax on a gain of up to $250,000 for a single person and up to $500,000 for a married couple filing jointly. To qualify you must have owned and occupied the property for at least two of the five years prior to the sale or exchange. You don’t need to buy a replacement home to qualify for the exclusion and can take advantage of it every two years, provided you meet the two-year ownership and residence rule. If your gain exceeds the exclusion amount, it’s subject to CGT as a long-term capital gain, even if you intend to buy a new residence at a price exceeding the sale price of the old residence.
Also in 1997, the CGT rate on long-term gains (i.e. on assets owned for at least 18 months) was reduced to 10 per cent for taxpayers in the 15 per cent income tax bracket and to 20 per cent for taxpayers whose regular top tax bracket is between 28 and 39.6 per cent. A 28 per cent tax ceiling applies to gains on sales of assets made 28th July 1997, provided you’ve held them for more than 12 but less than 18 months. Gains on property held for less than 12 months are fully taxable at your regular top rate. If property purchased after the year 2000 is held for over five years, the CGT rate is further reduced to 18 per cent or 8 per cent for those in the 15 per cent tax bracket. Gains from collectibles such as works of art, antiques, rugs or coins, however, remain subject to the 28 per cent maximum rate.
In most cases, when you buy and sell capital assets, each transaction is taxed as it’s concluded. Losses on property rentals can be carried forward and offset against a capital gain when a property is sold. When you sell a holiday home or investment property, improvements, selling costs and depreciation are calculated to arrive at the net gain. In Florida (and some other states) an amount equal to 10 per cent of the gross sale price of a property must be withheld by the buyer from the seller’s funds at closing. This used to pay any tax due, with the excess being refunded.
It’s possible to avoid or reduce the 10 per cent withholding requirement by applying for a withholding certificate prior to the sale closing date. However, you must show that the gain resulting from the sale will be less than the 10 per cent normally withheld. The IRS may then decide at its discretion to reduce the withholding tax to the amount calculated as your tax liability in your application for a withholding certificate.
You can protect yourself and your survivors from capital gains tax if you bequeath appreciated property, rather than give it away while you’re alive. This is because the tax basis of the property when you owned it, i.e. the purchase price, is increased to the fair market value on your death. For example, if you purchased a property for $100,000 that’s worth $300,000 when you die, the recipient will be able to compute capital gains as if he had bought it at $300,000. However, such bequests may lead to a higher estate tax liability, which must be taken into account. If you have a capital loss in any year, you’re limited to a deduction of $3,000 ($1,500 if married and filing separately), but any capital loss above $3,000 can be carried forward to future years to offset capital gains. Find More information about capital gain tax >>
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