When you buy, sell or otherwise dispose of certain kinds of property, the result is a gain or loss for federal income tax purposes. Property subject to these rules is considered a capital asset (yes, giving rise to the terms capital gain and capital loss).
For the most part, capital assets include everything you own and use unless it’s otherwise excluded – so easy, right? It not only includes personal use property like your home and your car but also investment property like stocks and bonds. The rules are largely the same for the two kinds of assets with the primary difference being that you may not deduct a loss from selling personal use property (you can take a loss for the sale of investment property).
To figure the tax treatment of your gain or loss, you have to know a couple of key pieces of information: your basis (most commonly, your purchase price plus adjustments), your selling price, and your holding period for the property.
Your holding period is generally defined as the amount of time you held the property. To figure this period, begin counting on the day you acquired the property. The day that you sold or transferred the property is your disposition date. You’ll count through – and including – the disposition date.
If you hold an investment property for more than a year, any capital gain or loss is a long-term capital gain or loss. If you hold the property for one year or less, any capital gain or loss is a short-term capital gain or loss.
Here’s an example of how you count days to determine the holding period:
Today is March 15, 2014. If you originally bought investment property on March 15, 2013, and sold it today, your holding period would be one year or less, and gain or loss from the disposition would be short-term. If you sold the same property on tomorrow, March 16, 2014, your holding period would be more than a year, and gain or loss from the disposition would be long-term.
Some specific rules apply, depending on the kind of property:
- For securities, your holding period begins the day after the trade date you bought the securities and ends on the trade date you sold them.
- For US Treasury notes and bonds sold at auction, your holding period begins the day that the Secretary of the Treasury, through news releases, gives notification of acceptance to successful bidders while the holding period for Treasury notes and bonds sold through an offering on a subscription basis begins on the day after the subscription is submitted.
- For real property, your holding period begins on the day after you received title or on the day after you take possession, whichever happens first, and ends at sale or disposition. However, if you sell property subject to a loan and later repossess it for nonpayment, your holding period begins on the date you originally obtained the property but does not include the period of time under which the subsequent owner took possession (you’ll want to back those days out of the count).
- Property you receive as a gift has a “carryover basis” and your holding period begins on the same day that the person making the gift originally acquired the property.
- If you inherit property, your holding period is always considered long-term – even if you sell the property the day after the original property owner dies (there’s an exception for certain estates who elect carryover basis treatment for decedents who died in 2010).
Other rules may apply to stock rights, property which is traded or bartered, stock dividends, and other special circumstances. Consult with your tax or investment professional to help figure out the kind of gain – don’t just make an assumption. This is important because the rate of tax you pay is based on whether the gain is short-term or long-term. The differences between those rates, especially in 2013, can be significant.
Short-term capital gains are taxed at ordinary income rates which means that you pay tax on those gains at the same rate as you report your other taxable income.
Long-term capital gains rates have changed for 2013. Basically, the rate of tax is 0% if you are in the 10% or 15% tax brackets; 15% if are in the 25%, 28%, 33%, or 35% tax brackets; and 20% for taxpayers in the new 39.6% tax bracket.
And don’t forget that, beginning in 2013, capital gains items may be subject to an additional 3.8% Medicare tax – called the net investment income tax (or NIIT) – for some high-income taxpayers.
