What is capital gains tax?
Taxes are one of the surest and greatest expenses you will pay in your adult life. As savers, we hate taxes. Yet, we still pay them, because getting into trouble with the federal and state governments is not a feasible long term savings strategy either.
A capital gains tax is money you have to pay when you sell a capital asset that has increased in value. A capital asset is defined by the IRS as basically anything you own, whether for personal use or as a business investment.
The personal residence you own is a capital asset. Shares you own in the stock market are capital assets. Even the furniture in your home is a capital asset. When your capital asset increases in value, this is called a capital gain. When your capital asset depreciates over time, this is called a capital loss.
When Do I Have to Pay Capital Gains Taxes?
You only have to pay capital gains tax when your capital gain has been realized, meaning when you have sold the capital asset that has increased in value.
Capital losses (depreciated capital assets that have been sold) can be deducted from your tax liability if the capital asset was used for business or investment purposes. This means that losses on real estate investments can be deducted. However, this does not apply to losses on your personal residence.
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