Capital Gains And Tax-Free Exchanges

When you buy property, you buy a “capital item.” What you paid for the property is called your “basis.” If you keep it for more than one year and then sell it for more than your basis, you will have a “long term capital gain.” Long term capital gains are taxed at lower rates than is ordinary income. Sometimes you can even defer the gain altogether by a “tax free exchange.” If you sell your property for less than its basis, you would have a capital loss. Losses can be netted against capital gains to reduce the overall amount on which you have to pay taxes.

Two notes of caution. First, for this discussion, the basis is assumed to be the price you pay for an item. In real life, the basis can be adjusted up or down through depreciation or improvements. Capital gains or losses are then figured as the difference between the sale price and the adjusted basis. And second, if you sell your property after holding it less than a year, your gain (or loss) will be short-term rather than long-term. Short-term capital gains are taxed at the same rates as ordinary income. To get the long-term capital gain advantage, you must hold your property for at least a year and a day before selling it. You should know that the Tax Code changes quite often, so to make sure this information is current please contact your tax advisor.

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