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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Sunday, July 02, 2006

Capital Gains Tax

Whether you know it or not gains on stocks, mutual funds, and even a house are all subject to capital gains tax.

If your capital makes money between the time you acquired it and when it is sold you will need to pay capital gains tax. The tax depends on several variables and criteria such as: how long you have owned the asset and the type of property you own. You never pay any capital gains taxes on it is actually sold for a profit.

Capital gains tax rates depend on how long you have owned an asset. If you have owned the asset for less than a year, capital gains would be taxed at the same rate as ordinary income. However, tax rates on income obtained from the sale of assets owned for more than a year can be as little as 5%.

In 1997 the federal government passed the "Taxpayers Relief Act" which almost eliminates capital gains taxes on home sales.

Currently, you can make up to $250,000 profit if you are a single owner, $500,000 if you are married, without having to pay capital gains on profits.

Rules for the Capital Gains Tax
  • The house being sold must be your principle residence. You have to have lived in the house for 2 of the last 5 years, but it does not have to be sequential.
  • You can only get free capital gains sale every two years.

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