Capital Gains

In depth

Capital gains equal the sale price minus the adjusted basis (original cost plus improvements minus depreciation). Long-term gains on assets held more than a year are taxed at 0, 15, or 20 percent federally, plus state taxes and net investment income tax. Short-term gains are taxed as ordinary income. Misconception: not every dollar of profit is capital gains; depreciation recapture is taxed at up to 25 percent and selling costs reduce gain. Practically, in installment sales, capital gains are recognized proportionally over the years payments are received, smoothing tax liability. Contract for deed sellers report gain on Form 6252. Section 121 exclusion can shield up to $250,000 (single) or $500,000 (joint) of gain on a primary residence, but it is unavailable for investor sales.