Not looking for tax advice and I know you don’t play a tax accountant on TV, but a general response would be appreciated.
In the US, if an individually owned property for longer than 1 year is sold, how does the capital gains tax work? Is it a straight percentage on the profit (eg, make 100k profit and pay 20% tax)? Or is it considered personal income (eg, added to your total income and pay whatever the tax bracket is on 100k + other income)?
Not 100% sure I’m understanding your question, but here goes. If all you have is net capital gain (so no capital losses to complicate things), then you pay the capital gains rate on your NCG, and your ordinary rate on your remaining income. I.R.C § 1(g).
So let’s say you have 200k in ordinary income, and 50k in NCG. Assuming your capital gains rate is 15% and you’re unmarried, you’d pay 7.5k on the capital gain, plus [consults the chart] a nominal rate of 36% on the ordinary income, for a total of $61,772 in ordinary tax liability.
$61,772 + $7500 = $69,272 total tax liability
You do NOT add the 200k and 50k to put you in the 250k tax bracket (at a nominal rate of 39.6%, that’d make your total liability $79,772), because that would defeat the purpose of the capital gains rate. Whatever that is.
Does that answer your question?
Last time I paid capitol gains the rate was 15% for the feds and 10% for the state.
Did that mean you paid 25%?
Randy - thanks that was helpful and what I was looking for.
Capital gains tax is only paid when the gain is realized, so you have to sell the appreciated asset to have a tax liability.
Short term capital gains are treated as ordinary income against the schedule for ordinary income.
Long-term capital gains are taxed based on a separate schedule.
In both cases the tax liability is lumped in with the rest of your tax liability for the year and what you pay in net taxes depends on the rest of your financial situation.
I could have a $25,000 tax liability from a long-term capital gain that is completely offset by other losses or tax credits, for instance. It’s not the case that I pay that capital gains tax separately simply because I liquidated the asset.
If you’re in the 10 or 15% tax bracket, then your long term capital gains rate is 0%. This is part of the Bush tax cuts and set to expire in 2011, so get your sell on. Higher brackets will raise from 15 to 20%.
Yep it was 25%.