Understanding Capital Gains Tax

To understand the capital gains tax, we must begin by understanding exactly what is meant by "capital gains". Capital gains is the income that a person gets from the sale of an investment. These investments may take the form of a piece of real estate property like a house or a farm. It can also be a family business or even a work of art. The capital gain is basically defined as the difference between the money that is realized from the sale of an asset and the price that was paid for it.

The amount of the tax that is imposed varies and actually depends on a variety of factors, which even include how long the seller has owned the investment/property as well as what type it is. The capital gains tax will not be asked for until the investment/property is actually sold. For instance, if the stocks in your portfolio have been appreciating in value, you can rest assured that you won't have to pay any type of taxes on them unless you have actually sold the stocks.

Investors should also remember that unlike other taxes, the rate imposed on the capital gains tax is not fixed. The rate imposed will depend on how long the asset has been owned. A good example would be an asset that has been owned for less than year. The capital gains tax that will be imposed on the sale of this property will be at the same rate as an ordinary income. On the other hand, the tax rates that will be given on the sale of a property that has been in the possession of the owner for more than a year can end up being lower.

As with all other tax impositions, there are a few rules that you need to be aware of in order to prevent any kind of major tax liabilities.

One rule that you should remember is that in most cases you can completely avoid capital gains tax if the house that you are planning to sell is considered as your principal residence. In order for a house to be considered as the principal residence you must have taken residence there for two of the last five years. The two years imposed don't necessarily have to be sequential years or even the most recent two years. Just as long as you fulfill the two-year rule the government will consider the house your principal residence. In fact, you don't even need to be living at the house at the time that you sell your property.