Sale of Capital Assets

Sale of Capital Assets

Almost everything you own is a capital asset. Some examples include a home, personal-use items like household furniture, and stocks/bonds held as investments. When you sell a capital asset you are taxed on the difference between the adjusted basis in the asset and the amount you realized from the sale.  You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis.

The IRS does have some rules that allow for capital assets to be sold tax free or reduced taxation.

How to avoid paying tax on the sale of a home:

The first option is to live in the house for at least two years. The two years do not need to be consecutive, but house-flippers should need to pay close attention. If you sell a house that you did not live in for at least two years, the gains could potentially be taxable. Selling in less than a year is especially expensive because you could be subject to the short-term capital gains tax, which is higher than long-term capital gains tax.

The second option is to see if you qualify for an exception. If you have a taxable gain on the sale of your home, you may still be able to exclude some of the gain if you sold the house because of unforeseen events.

The third option is keeping the receipts for your home improvements for the duration you own the home. The cost basis of your home typically includes what you paid to purchase it, as well as the improvements you have made over the years while owning the property. When your cost basis is higher, your capital gains tax will be lower. Some examples of capital improvements (things that improve the value of the property) are room additions, remodeling, landscaping, new roof, sprinkler system and new furnace/water heater/HVAC.

The fourth option is inheriting the property and claiming the step-up in basis.  There is a special rule that will allow the step-up in basis and if you decide to sell the property right away, this will typically result in little to no tax.

Contact LNK Tax Group at 661-491-7222 or 213-588-1120 or you can book a free consultation online to learn more about the sale of capital assets. We provide tax consulting and tax planning on maximizing tax deductions to businesses in Downtown Los Angeles and Santa Clarita including, Valencia, Stevenson Ranch, Newhall, Castaic, Canyon Country, Agua Dulce, Saugus, Rancho Santa Clarita, Sylmar, Mint Canyon, Val Verde, Mission Hills, Castaic Junction, Granada Hills, Porter Ranch, San Fernando Valley, and Los Angeles County.