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A History of Capital Gains Tax You Should Know

History

The United States Tax code includes a variety of scenarios in which citizens are expected to pay taxes. For example, the document will list tax rates, including capital gains tax. Although the Federal government, through the Executive branch, has the power to collect taxes in certain circumstances, so does the government of each individual state.

Although the federal capital gains tax is consistent, each state will have its own tax laws that reference capital gains taxes. On the federal level, capital gains taxes are offset by certain losses. However, some losses can not be used to offset income that is considered for the capital gains tax.

Capital gains can be profit that a person makes from the sale of a house. If that individual receives an amount higher than what they paid, that is considered a capital gain. If however, they make less money, it is a capital loss. Capital losses can be deducted indefinitely, against any income that is considered for capital gain taxes.

The sale of any property, including items such as furniture and sporting equipment, is considered a capital gain. Yet, when an individual sells them for less than what they paid, they can not take a loss against their capital gain taxes. There are actually very few items that can be used to offset income in reference to the capital gains tax. Vehicles that are sold for less than what was paid, for instance, can not be used as a loss for capital gain taxes. However, a home that sells for less than what was paid, can be used as a loss against capital gains taxes.

Capital assets that result in a profit over and above what was paid for an item, result in a larger capital gain tax. Currently, homeowners can make a certain profit in items and not have to pay a capital gain tax, but those laws are likely to change in the immediate future. In order to avoid paying capital gain taxes on the sale of a house, the homeowners had to have resided in that home for at least two of the last five years. That tax law went into effect with Taxpayer Relief Act of 1997.

Prior to that Act, homeowners had to purchase like property, or a property that had the same value, in order to avoid paying a capital gain tax. Currently, capital gains taxes are based on whether an investment is long term or short term. In order for an investment to be considered long term, the owner must have held that investment for at least a year. The day after the purchase, counts as the first day of ownership.

Capital gains taxes (CGT) are avoidable if investors plan ahead. For example, long term investments incur a lower tax rate. In addition, investment properties can incur lower taxes if the owners reside in those homes for a certain period of time before they sell them. In order to pay the lowest capital gain tax, investors should learn all applicable tax laws, including the laws in their state.

NEXT: Capital Gains Tax Rate On Real Estate

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