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Whether you are selling real estate, stocks, or antiques, chances are good the federal government will demand a cut of any profit you make on the transaction in the form of capital gains taxes. Fortunately for taxpayers, current long-term capital gains rates are relatively favorable, and lower-income investors now owe no capital gains taxes on the sale of certain types of assets. But, with the possibility of long-term capital gains rates rising in the future, you should start planning now to take maximum advantage of these reduced rates.
Capital gains arise when a capital asset is sold at a price that is higher than the basis, which is usually the original purchase price. A capital asset can be almost any property owned for personal or investment purposes, including stocks, bonds, land, homes, computers, and even household furnishings. Assets used in business may also qualify as capital assets, unless they can be depreciated or are inventory items. Under current law, profit from the sale is considered a short-term capital gain if the investment or property was held for a year or less and a long-term capital gain if the asset was owned for more than a year.
While short-term capital gains are taxed at the same rate as ordinary income, long-term gains are generally taxed at lower levels. Prior to changes in the federal tax law in 2003, investors whose income put them in the top four tax brackets faced long-term capital gains rates of 18% on the sale of assets held for more than five years or 20% on investments held for one to four years. Those in the lower brackets paid long-term capital gains rates of 8% or 10%.
For investors in the 25%, 28%, 33%, and 35% income tax brackets, the long-term capital gains rate is 15%. For investors in the 10% and 15% brackets, a 0% tax rate applies to both long-term capital gains and qualified dividends through 2014. A 20% tax rate applies to investors in the top tax bracket (39.6%). Some capital gains rates may be subject to an additional 3.8% Medicare tax.
While it is seldom wise to sell assets for tax reasons alone, if you have considered selling stock or other property, you may want to act to take advantage of these favorable rates before they expire. You may also be able to reduce or eliminate the capital gains tax bite by selling off investments that have decreased in value since you purchased them. If you lose money upon selling a capital asset, the loss can be used to offset any capital gains on a dollar-for-dollar basis, and the excess losses can be used to reduce your ordinary income. While the maximum deductible loss in any given tax year is $3,000, additional losses may be carried forward into future tax years.