10 Facts About Capital Gains Taxes

The government has increased the capital gains rate from 15% to 20% for most people. Special types of net capital gain can be taxed at a higher rate.

It is important to understand what a capital asset is and how they could affect your tax situation.

The Barron's Dictionary defines a capital asset as "a long-term asset, or asset with a life exceeding one year, that is not bought or sold in the normal course of business".

To clarify what capital gains are we will discuss the following 10 facts.

1. Many of the things you own and use for personal or business or investment purposes, including houses, cars, trucks, or boats are capital assets. Items that you consume are not capital assets. Generally, most things that you buy for personal use are worth less when you sell them than when you bought them so you do not need to worry about the taxes.

2. You have a capital gain or capital loss if you sell a capital asset for more or less than the amount you paid for that asset. The difference is a capital gain or loss.

3. According to the IRS you must report all capital gains whether it is business or personal. This does not mean that you have to report the amount of money you got when you sold a bicycle or home furniture (unless it is in the antique category).

4. You may deduct capital losses only on investment or business property, and not on property held for personal use. It seems a bit lopsided to have to pay taxes on all gains but not be able to take the loss. But, who said the IRS was fair.

5. When you sell a capital asset and make a profit then you have to pay taxes on the profit. The tax rate depends on whether you had the asset for less than one year or more than one year. If you had the asset for less than one year the tax rate is "short term" and if you owned it for more than one year it is "long-term" (lower tax rate). There are always some exceptions.

6. Subtract your long-term losses from your long-term gains and you owe taxes on the difference if you made more money than you lost.

7. The tax rate for short term capital gains is more than the tax rate for long term capital gains. The tax rate for long-term capital gains went up in 2010 from 15% to 20% for most people. Some tax rates are higher. Short-term tax rates are at the individual tax rate.

8. When your capital losses exceed your capital gains you can take a deduction of up to $1,500 or ($3,000 married filing jointly).

9. If your losses are more than you are allowed to deduct in that year than you can carry the losses forward (meaning that you can deduct your allowed amount each year until all of the losses have been deducted). With the downturn in the economy many people lost a lot of money. It seems that it will take years before they will be able to deduct all their losses.

10. To report capital gains or losses use the tax form, Schedule D, then the final number is put on your tax form 1040.
Each year the IRS changes hundreds of things in the tax code. It is one of those things that you have to keep on your toes about. We try to keep up with the changes that will affect our audience.

If you have a question that is not covered on the blog. Do not hesitate to ask a question in the comments section.

Although we are not CPAs or tax attorneys we do extensive studying of the tax code and will give you what we find out.
Learn more at http://www.NewTaxChanges4Investors.com/blog

Minimising Capital Gains Taxes When Selling Stocks

If you are located in the UK: The answer is simple really here. Instead of buying and selling stock and shares, use financial spread betting to trade. Spread betting is a form of short-term trading that is ideal for taking directional speculative positions on the stock market. In the United Kingdom and Ireland, no tax is applicable on gains made through spread betting because it is considered a gambling activity. You are also able to short markets as well. Alternatively, you can make sure of an Individual Savings Account to shelter your money from the taxman. The UK has recently introduced new rules that should be welcomed by regular share investors who want to reduce their CGT liability. Such individuals are likely to get the most from having an ISA.

If you are located in the USA: Under current USA law, you can donate appreciated stocks to charitable organizations and make a deduction on the full market value of the stocks without paying capital gains taxes if (and only if) you've held them for more than a year. So if you're planning to make a significant tax-deductible donation, don't do it in cash; donate the long-term-held stocks instead.

If you are located in Canada: In Canada, you can move your shares in a portfolio, without having to sell them, into a tax-protected program quite similar to the US 401(k). It's referred to as RRSP in Canada. You can sell without having to materialise gains at all, but it has to remain in the sheltered account in order to retain the tax protection. Having said that, in Canada, once you take the money out of the sheltered investment vehicle it's taxed normally as income.

In addition, it is worth noting that in the USA and most other European countries longer term gains like proceeds from funds are taxed more favorably. Of course it helps your tax situation if you can offset your trading and investing gains with losses like what you can do with CFDs.

1031 Exchanges - The Legal Way To Defer Investment Property Capital Gains Tax

With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties. However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?

A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate. Normally when an investment or business property is sold, capital gains tax has to be paid. However, with 1031 exchanges, by replacing the old property with a like kind property, within set time limits, payment of capital gains tax can be avoided.

Under the 1031 exchange real estate rules, a seller must have held a property for at least one year and a day for it to qualify. Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a likekind - either rental properties, vacant land, trade, business or investment properties.

1031 exchanges must be completed within strict time limits. There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified. The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.

The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules. With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.

Capital Gains Tax Loopholes Shrinking

Seems the new 2008 housing bill was not a savior for all of us - like a scorpion there is a little kick in the tail! However, struggling home owners can breathe easy, the kick is not directed at them, in fact, it is aimed at real estate investors.

Whoever it is aimed at in the real estate market, it will not give the realty world a much needed boost as it is yet another deterrent to buying a home, this time aimed at investors.

Capital gains tax is always part of the profit and loss formula when investing in realty, and the levels were generously high for both investors and regular residents who live in their home. Residents still have the same concessions but now it has changed for investors.

To re-cap on the capital gains that was - and still is for residents owning one house in which they are living and have lived for two years: the allowance on capital gains is $250,000 for a single person and $500,000 for a married couple.

Capital gains taxation is only charged on the profit made on the sale of the house, which is usually not necessarily on the actual sale price of the house.

However, there is a marked change in the taxation laws for people who buy a home and rent it for a while and then move into the home for a two year period prior to selling it.

It used to be possible to sell the home and convert all the profits that were made when it was a rental into tax free income under the capital gains umbrella. The new law has changed all that.

Even though investors may have lived in the rental home for two years before selling it, their capital gains allowance is no longer sacred. The new law says it must be calculated pro-rata and is divided between the taxable years that it was a rental property and the non taxable years when the owner lived in it.

This new rule comes into effect on January 1st 2009 and this is a hypothetical example of how it might look. You buy a home in June 2009 for $400,000 and you rent it out for three years, live in it for two years and sell it in June 2014 for $700,000. (Dream on!)

This means that you have a capital gain of $300,000 (assuming that nothing can be used as tax write-offs). Under the old system you could be exempted from capital gains tax by using your single person's allowance of $250,000 capital gains exemption. This means that you would have only had to pay capital gains tax on the last $50,000.

This no longer applies; now the tax department will tell you that yes, you may claim the capital gains exemption for the two years that you were actually living in the residence i.e. you can claim two fifths of the $300,000 profit against your own personal allowance of $250,000. This calculates into $120,000.

However, for the other three years -when it was a rental property - the capital gains tax is applicable. Therefore, you will pay the percentage rate of capital gains tax on the remaining $180,000 (three fifths) of the profit of $300,000 that you made when you sold the house.

Flipping and Capital Gains

A common dilemma for real estate investors is the issue of flipping and taxes. In this article, we look specifically at the tax issues associated with flipping and capital gains.

In recent years, people have been looking at the real estate market as they once looked at the stock market, eyes filled with dollar signs. Flipping became a popular real estate investment strategy to make fast cash. However, one thing that people forgot in their haste to play the game was to be properly prepared with the knowledge to avoid paying high taxes on their profits. Towards that end, here's some noteworthy information about taxes as you think about your flipping strategy.

First, in order to avoid overly onerous "ordinary income taxes" on flipping properties you must have the property treated as a capital gain. Most often, if you sell the property in less than a year, you will be taxed at the ordinary income tax rate, which can be in excess of 35 %. Only when you've held the property for more than a year, does the long-term capital gains tax of 15 % (for most tax payers) come into play. In order to have the property treated as a capital gain you must show that you had no intention of flipping that property. Ironically, this could entail holding the property for this extended period of time which counteracts the whole point of flipping - which is to make money fast.

Also, it's not only about "when" you flip, but about "how often" you flip. If you flip too often, the IRS may view that this strategy is your "trade or business" and therefore the profits you make are subject to ordinary income and self-employment taxes. And you don't want that.

Secondly, if you want to employ other strategies to avoid big taxes like installment or structured sales or private annuity treatment while flipping, you can't. Spreading tax out doesn't work because the property is not labeled investment property. This again goes back to issue of holding periods and intention of sale.

If you are hoping to use the 1031 exchange strategy as the approach for flipping and capital gains, again you will find yourself between a rock and a hard place. 1031 exchanges are reserved for investment properties only and if you can prove, through holding periods and intention, that the property is a capital gain or investment property, you will not be eligible. The IRS supports investors and savers, not speculators and gamblers.

Once most of your tax deferral options are exhausted, your last resort for flipping and capital gains may be to have that property re-characterized to a capital gain property by moving in to it and treating it as your personal residence. It may work, but holding even longer holding periods apply.

In conclusion, flipping can be an exciting and fast way to make money. But when it comes to taxes it is hard to make flipping and capital gains work together.

Capital Gains Tax Rates in the UK

It is mandatory to pay capital gains tax if you dispose of any asset by transferring or giving it way. You are also subject to paying the CGT if you receive compensation, for example, you may receive compensation for a damaged good from an insurance company.

You do not have to pay any capital gains tax on the sale of your car, and first home, under most conditions, ISAs or PEPs, UK government gilts (bonds), income from betting, lotteries or pool winnings, or in other words, any money that is already subject to income tax.

Calculating the CGT:

When you sell an asset: Let us assume you bought some shares for £1000 and you sold them for £2000. You would need to pay CGT on the gain which in this case is £1000.

When you give an asset: It is important to point out that you need to pay CGT on the value of the asset and not what you get from it. To illustrate this, let us consider that you bought a flat for your son at £70,000 four years ago and its value has now appreciated to £100,000. Suppose you let him have it at less than the market value, £75,000. Your gain would be £100,000 minus £70,000 which is £30,000.

When you dispose of an asset: If you dispose of an asset which you received as a gift, your gain will be based on the market value when you received it. For example, you are gifted a garage whose value at the time when the gift was made was £5000. Now you sell it for £8000. Your gain in this case will be £3,000.

India's Direct Tax Code and How it Will Impact Wealth Creation From Next Year

India is soon going to have a new set of rules for direct taxes, which will replace the 50-year-old Income Tax Act.

The so-called Direct Tax Code, which is scheduled to come into force from financial year 2011-12, had prescribed removal of almost all tax rebates in individual investments but also proposed raising the income limits for various tax slabs drastically.

However, the proposals drew sharp reactions and after reviewing some 1,600 public suggestions/comments, the government on Tuesday unveiled a more polished version of the code, which toned down some of the proposals.

As per the revised paper, provident funds and pure life insurance products will continue to enjoy the so-called exempt-exempt-exempt - suggesting tax exemptions in the three stages of investment, accrual of gains and withdrawal of investment - a status they now enjoy.

"It is proposed to provide the EEE (exempt-exempt-exempt) method of taxation for government provident fund, public provident fund and recognised provident funds..." the discussion paper said.

The paper clarified that the EET (exempt-exempt-tax) regime should be restricted to new savings instruments after DTC comes into effect, and the same should not apply to existing saving instruments.

Ulips or unit-linked insurance plans - which have been at the centre of a public debate of late - have been brought under the EET regime after the DTC comes into force.

Similarly, stocks investors will no longer be able to enjoy tax-free gain from long-term investment in equities as the DTS proposes to treat both short-term capital gains as well as long-term capital gains for tax calculation purposes.

Moneyguruindia tax experts analysed the proposals threadbare and came up with a detailed analysis of the tax incidence on various investment instruments as proposed under the new rules.

PAY AND PERKS:- The proposal to bring in perquisites like government accommodation to be part of salary has also been dropped. All perks will continue to be taxed as per existing norms. First draft didn't not find favour with the salaried class

INCOME TAX SLABS:- Revised DTC silent on personal income tax rates and slabs. First draft suggested 10% tax on income from Rs 1.60-10 lakhs and 20% on income between Rs 10-25 lakhs and 30% beyond that. Revenue secretary says these slabs are only illustrative and they will be fixed at the time of notifying the tax code

HOME LOANS:- Government decides to continue with the major tax incentive on housing loans. Revised draft says home buyers will continue to get tax benefit on payment of interest on home loans up to Rs 1.5 lakh annually. Actual rental income will be taxed.

INSURANCE AND ULIPS:- No tax proposed on life insurance products under exempt-exempt-exempt norm. New Ulips issued after DTC becomes operational will be taxed on maturity or withdrawal. Existing Ulips will be exempt from tax either on maturity or withdrawal midway.

EQUITY MUTUAL FUNDS: - The draft DTC proposes long-term capital gains tax on units of equity funds. At present, equity funds that lock in investments for more than three years enjoy tax exemption as there is no long-term capital gains tax. The draft DTC proposes to compute long-term gains on equity and equity funds after allowing a deduction at a specified percentage of capital gains without any indexation.

STOCKS INVESTMENT: - The difference between long-term and short-term capital gains has been eliminated. Capital gains will be treated as income from ordinary sources and taxed at applicable rates. Specific rate of deduction for capital gains is to be finalised. But not tax on capital gains from savings schemes.

PROVIDENT FUND: - The proposal to tax government provident fund (GPF), public provident fund (PPF) and pension funds withdrawals has been dropped. It is proposed to provide the EEE (exempt- exempt-exempt) benefit to GPF, PPF and recognised provident funds. First draft had proposed to tax all savings schemes including PF's at the time of withdrawal.

PENSION PRODUCTS: - Revised draft puts pensions administered by PFRDA, including pension of government employees recruited since January 2004, under EEE treatment, means no tax any stage. "In the absence of adequate social security benefits, taxation of withdrawals from retirement benefits would be harsh," says the revised DTC.

By UDAY SHANKAR