Long-Term Capital Gains Rules

• The tax rules for long-term capital gains depend upon the asset type and sale terms.piggy bank image by forca from Fotolia.com
  
  You don't get a tax deduction for the loss on selling your old television, but you are taxed on the gain from selling your 1965 Mustang. All capital gains are taxable, but only losses on investment property are tax deductible. Everything you own that isn't "used up" or "worn out" is a capital asset that creates a capital gain when sold for more than your cost. Capital gains are classified as long term when you hold the property for more than one year before you sell it.
  
  

Defining Capital Gain

• Your capital gain is any excess of the selling price over your basis. Normally, your cost is your basis. Your cost includes expenditures to improve---but not simply maintain---the capital asset. For example, replacing the brake pads on the '65 Mustang doesn't add to your basis, but replacing the fender does increase basis. Costs that add to the value of an asset are additions to basis.
  
  Your basis in an asset you receive as a gift is the cost to the giver. You take his basis when you accept the gift. However, for a testamentary gift, which is given from an estate after someone dies, your basis is the value of the asset on the date of death.
  
  

Tax Rules

• The tax rate on a long-term capital gain is lower than the rate that applies to other income. This rate is subject to change, as tax laws are revised periodically. The tax rate for a capital gain on collectibles---such as works of art or coins---is higher than the long-term capital gain rate on other assets. Another tax rate applies to a sale of real estate that is subject to depreciation, such as a rental house or a commercial building.
  
  Long-term capital gains are offset by short-term losses to determine taxable gain. You cannot deduct losses on "wash sales." This is the sale of a security for a loss and then a repurchase of an identical security within 30 days of the sale.
  
  

Special Assets

• Selling stock in a small-business corporation is also taxed at a different rate from other long-term capital gains. However, under certain circumstances you can defer tax from the gain on stock in a small-business corporation. To qualify, you must be the original owner of stock in a C corporation with less than $50 million in assets and purchase an equal amount of stock in a similar corporation within 60 days.
  
  Selling your primary residence triggers special capital gain rules. If you lived in your home for at least two of the past five years, you can exclude $250,000 of a capital gain from your tax calculation. A couple filing a joint tax return can exclude $500,000 of a capital gain.
  
  

Exchanges

• You can defer paying tax on the capital gain from selling business and investment property by purchasing replacement property of equal or higher cost. The property must be tangible assets and not paper assets such as stock or notes. Replacement property must be identified within 45 days of the sale that created the gain. In addition, the replacement property must be similar to the property sold. For example, a sold commercial building may be replaced with an apartment building but not machinery.
  
  

Installment Sales

• You have an installment sale if you sold property at a gain and receive payments beyond the year of sale. You have the option to pay tax on the capital gain in the years that you actually receive the money. A profit percentage is determined from dividing the capital gain by the sale price. Multiplying the profit percentage by the installment payments each year determines the annual taxable capital gain component of the money received.