Capital Gains – Where Do You Stand?
Capital gains” are profits you make from selling property held for business or investment. Gains from property held up to a year are classified as “short-term” gains. Gains from property held for more than a year are classified as “long-term” gains.
To calculate your gain, start with “adjusted selling price.” This generally equals sale price, minus any cost of sale (commissions, etc.) Then subtract your “basis.” This generally equals your purchase price, plus commissions, sales taxes, improvements, and the like. The resulting difference will be your gain.
Under current law, tax on most long-term capital gains is capped at just 20%. But one dollar of long-term gain can actually cost you more than 20 cents in tax. That’s because capital gains can cause what is called the “AGI effect.” Gains above certain levels will phase out breaks such as medical and miscellaneous deductions, child tax credits, American Opportunity and Lifetime Learning credits, and the rental real estate loss allowance. Capital gains also increase your provisional income for determining tax on Social Security benefits.
Tax on long-term capital gains is also capped at 20% under the Alternative Minimum Tax (“AMT.”) However, long-term gains can increase the amount of ordinary income subject to AMT.
If you’re selling depreciated assets, you may also have to “recapture” some of that depreciation and pay tax on it. Recaptured depreciation is taxed at ordinary rates, except for depreciation on real estate, which is capped at 25%.
If you’re selling assets like a business, stock portfolio, or real estate, you can find yourself facing substantial taxes, even with lower long-term rates. The table below identifies strategies you can use to cut taxes on sales of those assets.