Taxes. They are everywhere! Sadly, your taxable income isn’t the only place the government will take its cut. You can expect to pay taxes on the profits made on the sale of any capital assets. Because tax law is notoriously confusing, you might not know which assets apply. Here are three assets to which capital gains taxes apply.
Stocks
You don’t owe money on your stocks until you are ready to sell. At that point, the purchase cost is subtracted from the sales tax and that is the figure you are required to report. Of course, the IRS can’t make it as simple as that so there is a little more to it.
It also depends on how long you have owned the stocks. If you own your stocks for a year or more before selling, your tax rate is equal to your normal income tax rate. However, if you own your stocks for less than a year, you will pay a higher tax rate on the profits.
Real Estate
The tax code really gets complicated when it comes to real estate. Just about every specific detail comes into play when determining the taxes you owe on your real estate after a sale. The main concern is when your property appreciates significantly between the point of purchase and the time of sale. Thankfully, most homeowners won’t be required to pay capital gains taxes on their real estate because of the Taxpayer Relief Act of 1997. This act states that single individuals only have to pay taxes if their capital gains total over $250,000.
For married couples, the capital gains have to exceed $500,000. Of course, it isn’t that simple. Other considerations include how long you have owned the property, if it is a primary residence, and if it is inherited. If you receive the property from an inheritance, your cost basis is stepped up.
Mutual Funds
Like most capital gains taxes, taxes on mutual funds come in two different rates: long and short-term. Long-term rates apply to mutual funds not in a tax-free account that you have owned for longer than a year. Short-term rates apply to mutual funds not in a tax-free account that you have held onto for less than a year. As you would expect, long-term rates are significantly lower than short-term rates.
Just get used to the idea that any time you make money, you will be taxed! There are ways to lower your capital gains taxes, including holding on to your assets longer-term and putting your funds in a tax-free account. Ask your financial advisor for more information.
Did you enjoy reading this article? Here’s more to read: How to Reduce Your Income Taxes