I’m Tom Mitchell. I’m a law partner at Waller and Mitchell in New Port Richey, Florida and I want to speak to you this afternoon for a minute or two about capital gains taxation. The capital gains tax is a tax that is levied on the sale of appreciated assets, based on the profit that you make when you sell.
There are two types of capital gains: short term and long term. Short-term are for assets held less than a year. Those get taxed as ordinary income. Long-term capital gains are those held more than a year and they get taxed at a special rate somewhere between 10 percent and 15 percent, depending on your other income.
So exactly what can be a capital asset that is subject to the tax? Pretty much anything, other than something you hold in inventory in your business or as stock and trade, so even cars and personal effects in your house are technically capital assets that could be subject to the tax. Of course, nobody keeps any records on those kinds of things, so very seldom do we see that, unless you have a very expensive painting or something with documentation. But the most common things that we talk about are stocks, bonds, mutual funds and real estate.
Now, real estate includes your personal residence. However, there’s a specific exemption in the law for personal residences, for a married couple of gain of less than $500,000.00 and for a single-person gain of less than $250,000.00, but that’s the single exemption that’s specific to the Internal Revenue Code.
So what happens in a capital gain transaction? How do they compute the tax? Well, they take the purchase price that you paid for the property to start with and they call that “basis” in the tax trade and they add to the basis any structural improvements that you may have made to the property, then when you sell it they subtract that from the selling price to come up with the gain. Then they apply a 15 percent tax rate to the gain to get you the tax.
So let’s take an example. You buy a vacation home up in North Carolina and you pay $100,000.00 for it. The next year you put a deck on the back of the property. The deck’s worth $10,000.00, so you have got $110,000.00 invested in the property. In 2002, more than one year later, you sell the property for $210,000.00, so your gain is the $210,000.00 minus the $110,000.00, or $100,000.00 and the tax due on that transaction at the 15 percent rate is $15,000.00.
So, if you have any questions about capital gains tax or any other tax issues, give me a call. This is Tom Mitchell at Waller and Mitchell, my telephone number (727) 847-2288.