Selling Property & Taxes

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Whenever you sell a piece of your property, the IRS wants its share of your profit. The agency requires taxpayers to report all income, including the money you make from selling your property. However, if you are not a business selling inventory, it’s likely that you are subject to the capital gain rules, which can actually save you some money on taxes.

Capital Assets

When selling property, the first thing you need to determine is whether it’s a capital asset. Generally, everything you own for personal use is considered a capital asset. This includes the stocks you invest in, your car, home furnishings and many other items. Your home is also a capital asset; however, the IRS provides a special exclusion for a large portion of the gain you recognize in a sale. As long as you satisfy certain requirements, you can exclude up to $250,000 of the profit, or $500,000 if you own the property jointly with a spouse.

Not Capital Asset

The IRS specifically excludes certain types of property from being a capital asset, and when you earn a profit from selling this type of property, the gain is subject to different tax rules and rates, and in some cases, may be taxable in the same way as your employment salary. This type of property includes the items you purchase and hold mainly for sale to customers in a business, debts owed to you as a result of a business transaction, any equipment you use in the business and any commercial real property.

Tax Basis

The IRS doesn’t expect you to pay tax on the gross amount you receive from selling your property, only the taxable gain. You determine your taxable gain by first computing the tax basis of the property, which also represents your total cost or investment in it. To illustrate, if you purchase a stock for $5 per share and later sell it for $12, then your taxable gain is the sale price minus the basis, which is $7. As you can see, you get to keep the original price you pay for the stock without paying tax. Although just one example, the method for computing taxable gain is the same for all capital assets.

Deductible Losses

In the unfortunate event the sale of your capital asset results in a loss, meaning that you sell the stock for $3 rather than $12, there are ways you can deduct it to offset other taxes. First, you can always use a loss from the sale of a capital asset to eliminate tax on the gain from the sale of other capital assets. Furthermore, if you don’t have any other capital gains during the year of your loss, you can deduct up to $3,000 from your regular taxable income and carry the remaining loss forward. As you carry the loss forward to future tax years, you must always apply as much as you can to offset capital gains before the IRS will allow you the $3,000 deduction again.

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