EVER NOTICE HOW DOING YOUR taxes gives you a headache? The IRS has a complex taxing system. Currently, the tax rate on short-term capital gains — assets held for one year or less — are taxed at your normal income tax rate, which is 10 to 35 percent. When you sell a taxable item, such as real estate or stocks, that you have owned more than a year, you pay a sliding scale of fees that can range from 0 to 28 percent depending upon the nature of the capital gain. The taxes you pay on any given sale depend on your income-tax bracket, the type of asset you sold, and how long you held it, and when you sold it. Smartmoney.com’s Bill Bischoff, offers highlights on the breakdown of who pays what with long-term capital gains.
HOMES AND SMALL-BUSINESS STOCK ■ The 0 percent rate Eligibility: Homeowners who owned and used their home as a main residence for at least two years before selling; some shareholders of small-business stock.
If you sell a home you’ve owned and used as your main residence for at least two years out of a five-year period, you are allowed to exclude up to $250,000 of gain tax free. If you are married, you can potentially exclude up to $500,000.
If your gain exceeds the amount you can exclude, the difference is treated as a long-term capital gain eligible for the 15 percent maximum rate (or 5 to 10 percent if you’re taxable income is low enough).
INVESTMENT SECURITIES ■ The 5 percent rate Eligibility: Individuals in the 10 to 15 percent federal income tax brackets with net long-term capital gains from selling investment securities held for more than one year.
Individuals in this bracket in 2006 earned a taxable income of up to $29,700 for singles, $59,400 for joint filers, $39,800 for heads of households, and $29,700 for married individuals who file separately.
Here’s how this rule works. Let’s say you’re filing jointly and had $55,000 of “regular” taxable income in 2006 and a net long-term gain of $10,000 from stock sales. The first $4,400 of gain from the stock sale will be taxed at 5 percent. The remaining $5,600 ($10,000-$5,600) will get taxed at the standard 15 percent rate. If the net long-term gain is $4,400 or less, the tax rate is 5 percent on the entire gain. ■ The 15 percent rate Eligibility: Individuals in the 25 percent federal income tax bracket or higher with net long-term capital gains from selling investment securities held for more than one year. ■ The 25 percent rate Eligibility: Property owners and real estate investment trust (REIT) investors in the 25 percent income-tax bracket or higher who hold property for more than one year.
Investment real-estate gains are taxed in two ways. If you claim depreciation deductions, at least some of those gains are taxed at a maximum rate of 25 percent.
For example, say you own a rental property and have deducted $32,000 of depreciation over the years. That depreciation reduces your basis in the property and results in a bigger taxable gain (or smaller loss) when you sell. Say you sold in 2006 for a $100,000 gain. The first $32,000 (called an unrecaptured Section 1250 gain) is taxed at a maximum rate of 25 percent. The remaining $68,000 of gain is taxed at the standard capital gains rate of 15 percent.
If you own shares in a REIT, when the REIT sells a piece of depreciable property and distributes the profit to its shareholders, you are taxed at the 25 percent maximum rate.
COLLECTIBLES AND SMALL-BUSINESS STOCK ■ The 28 percent rate Eligibility: Any collector in the 28 percent tax bracket or higher; some small business stock shareholders.
Net long-term gains from collectibles (stamps, coins, baseball cards and the like) are subject to a 28 percent maximum rate. This rate also applies to the taxable part of a gain from selling certain small-business stock that qualifies for a special 50 percent gain exclusion rule. Basically, these are shares in relatively small corporations that were originally issued to you and that you’ve owned more than five years.
For more information on capital gains, try www.smartmoney.com.
For making capital gains and other tax scenarios work for you, please consult your accountant.
JODI SUMMERS negotiates investment properties for Sotheby’s International Realty. For your real estate needs, , or call (310) 260-8269. Visit her websites at http://www.SoCalInvestmentRealEstate.com or http://www.santamonicalandmarks.com.
Originally published in the Santa Monica Daily Press print edition on February 21, 2007. Read the original PDF.