If you sell shares in a stock, mutual fund or investment property for more than you have invested in it, the Internal Revenue Service (IRS) is going to take a cut. In most cases, sales of appreciated property fall under capital gains tax rules, rather than income tax rules. Taxes on property held for longer than a year are typically lower than income taxes.
1. Determine your basis in the property. Your tax basis is the total amount you have invested in the property for tax purposes. This includes your original purchase price, minus any deductions you have taken for depreciation over the years, plus any money you spent on capital improvements and renovations.
2. Identify your purchase date. This is important because the IRS charges capital gains tax for most property based on how long you have held it. If you held it longer than a year, you get charged the long-term capital gains rate. If you held it less than a year, you get charged at your ordinary income tax bracket. As of the the time of publication, that could be as high as 35 percent.
3. Download Schedule D of the Form 1040 Individual Income Tax return from IRS.gov. This is the form you use to report capital gains and losses to the IRS. The instructions and the form itself will walk you through the calculation. You cannot use a Form EZ if you have capital gains to declare.
4. Calculate your tax. Fill out the worksheet on page D-10 of the instructions for Schedule D. This is a tedious step, but it is important to be accurate, since you will pay a penalty for any capital gains taxes you underpay.
- Don't forget, you can use capital losses to offset an unlimited amount of taxable gains. If you expect a capital gains tax liability toward the end of the year, look at your portfolio to see if you can sell anything at a loss.
- Some items, such as collectibles, get taxed at a flat rate of 28 percent of any gains. Also, if you buy and sell assets as a primary part of your trade or business, you may have to declare profits as income, not capital gains. Bonds purchased at a discount to market value and then sold at a gain may be partially taxable at ordinary income rates, under market discount rules.
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