What is Capital Gains Tax?

Capital gains tax is imposed on profit income from the sale of property or any investment.  Any profit that arises from the sale of a capital asset is a capital gain. It’s income through profit. Hence capital gains tax is similar to income tax. You need to pay for it when you generate profit. These can be short term or long term gains. It is imposed only on selling a property and not if you inherit the ownership.

There are two types of capital gain taxes — long term imposed on profits earned from an asset sold after one year. The short time applied to assets only held for less than a year, and it does fall under ordinary income.

How do Capital gain taxes work?

All capital gains are taxed, but the approach a different for short term and long term gains. The profits on assets held less than a year, do not generate a high amount of taxes. They are as good as your earned income. The tax amount remains the same as your regular income tax. Unless the amount of profit is more than the marginal short term capital gain does not do much in case of taxes. Things change when it’s over a year or more.

For assets held for more than a year, the entire rules change. If it earns a profit than the tax is based on a rate schedule made every year, according to income thresholds. Long term capital gain taxes are taxed at lower rates than individual income usually.

There are basic rules and exceptions for these taxes. Gains on any collectibles like art, antiques, jewelry, etc. are taxed at a fixed rate, for instance as of, 2019 it is 28%, irrespective how much profit you earn. High profit or low profit, the tax is limited to 28%

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While it works differently in the case of real estate, if you decide to sell your residence a particular fixed amount from capital gains of property is exempted from taxes, as long as it has been a residential property for at least two years. The same is not applied in case of losses; they are not deductible.

Though, real estate investors get the liberty to take depreciation deductions as the property ages, because an old property might not lead to a sufficient income. The deduction might lead you into increasing your taxable gain when you sell the property. Because you need to pay a tax after redeeming the deductible price and the rest of the amount shall go under taxation.

Any capital gains tax reduces the overall income that you can generate from any investment. But different strategies help you minimize or avoid the charges. The simplest one is holding the assets for more than a year because long term assets have more tax benefits than short term ones. Apart from that, various strategies will help you like pairing losses and gains, swapping one asset for another, etc.

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Mark Holland

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