Capital Gains and Losses
When a person sells a capital asset, the sale normally results in a capital gain or loss. A capital asset includes inherited property or property someone owns for personal use or as an investment.
Here are what you should know about capital gains and losses:
- Capital Assets. Capital assets include property such as a home or a car. It also includes investment property, like stocks and bonds.
- Gains and Losses. A capital gain or loss is the difference between the basis and the amount the seller gets when they sell an asset. The basis is usually what the seller paid for the asset.
- Net Investment Income Tax. Taxpayers must include all capital gains in their income. Capital gains may be subject to the Net Investment Income Tax if the taxpayer’s income is above certain amounts. The rate of this tax is 3.8 percent. For details, visit IRS.gov.
- Deductible Losses. Taxpayers can deduct capital losses on the sale of investment property but can’t deduct losses on the sale of property they hold for their personal use.
- Limit on Losses. If a taxpayer’s capital losses are more than their capital gains, they can deduct the difference as a loss on their tax return. This loss is limited to $3,000 per year, or $1,500 if married and filing a separate return.
- Carryover Losses. If a taxpayer’s total net capital loss is more than the limit they can deduct, they can carry it over to next year’s tax return.
- Long and Short Term. Capital gains and losses are either long-term or short-term. It depends on how long the taxpayer holds the property. If the taxpayer holds it for one year or less, the gain or loss is short-term.
- Net Capital Gain. If a taxpayer’s long-term gains are more than their long-term losses, the difference between the two is a net long-term capital gain. If the net long-term capital gain is more than the net short-term capital loss, the taxpayer has a net capital gain.
- Tax Rate. The tax rate on a net capital gain usually depends on the taxpayer’s income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.
Home Office Deduction
If you use your home for business you may be able to deduct expenses for the business use of it. Qualified persons can claim the deduction whether they rent or own their home. Use the simplified method or the regular method to claim a deduction.
Keep in mind the following about the home office deduction:
- Regular and Exclusive Use. Generally, taxpayers must use a part of their home regularly and exclusively for business purposes. The part of a home used for business must also be:
- A principal place of business, or
- A place where taxpayers meet clients or customers in the normal course of business, or
- A separate structure not attached to the home. Examples could include a garage or a studio.
- Simplified Option. To use it, multiply the allowable square footage of the office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save time because it simplifies how to figure and claim the deduction. It will also make it easier to keep records. The rules for claiming a home office deduction remain the same.
- Regular Method. This method includes certain costs paid for a home. For example, part of the rent for rented homes may qualify. For homeowners, part of the mortgage interest, taxes and utilities paid may qualify. The amount deducted usually depends on the percentage of the home used for business.
- Deduction Limit. If the gross income from the business use of a home is less than expenses, the deduction for some expenses may be limited.
- Self-Employed. Taxpayers who are self-employed and choose the regular method should use Form 8829, Expenses for Business Use of Your Home, to figure the amount to deduct. Claim the deduction using either method on Schedule C, Profit or Loss from Business.
- Employees. Employees must meet additional rules to claim the deduction. For example, business use must also be for the convenience of the employer. If qualified, claim the deduction on Schedule A, Itemized Deductions.