By A.J. Gross, C.P.A., E.A.
When most people think of capital assets, the first thought is stocks. Stocks are considered a capital asset, however personal property are also considered capital assets. We will provide a overview of capital assets.
Investment property such as stocks and bonds are considered capital assets. All personal property you own are considered capital assets too. This may include your home, car, furniture, cell phone, collectables, and any other personal property.
A gain or loss from the sale of a capital asset is the difference between your basis of the capital asset and the amount received from the sale. Your basis in the capital asset is generally the amount you paid for the capital asset. For example, you purchased a car for $25,000. Your basis in the car is $25,000.
The sale of a capital asset for an amount greater than your basis in the capital asset results in a gain. Generally, all gains are taxable. Going back to the previous example, you purchased a car for $25,000. Then you sell the car later for $30,000. The result is a $5,000 taxable gain. Usually, you don’t have to worry about taxable gains when selling your car. This is because cars generally don’t appreciate in value. But what if you purchased the car on eBay for $10,000, fix up the car and then sell the car for $12,500? You made a nice $2,500 profit which is considered a taxable gain.
How gains are treated for taxes depend on the length of time the capital asset sold was held. A capital asset that is purchased and sold for a gain within one year is considered a short term capital gain. A capital asset that is purchased and sold for a gain longer than one year is considered a long term capital gain. You will pay less tax on long term capital gains. Therefore, it is too your advantage to hold property for longer than one year if you expect a taxable capital gain.
Losses on investment property are tax deductible. Losses on personal property are not tax deductible. Again going back to the earlier example, a car was purchased for $25,000. The car was owned for 5 years and sold for $12,500. The result is a long term loss of $7,500. This loss is considered a personal loss and is not tax deductible. This is why most people don’t worry about the tax consequences of having a yard sale or selling personal property. Generally, most sales of personal property results in a non-deductible capital loss.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com or www.algtaxsolutions.com.
This was printed in the August 9, 2015 - August 22, 2015 edition.