taxed based on the published graduated rates. In addition, what you are ultimately taxed will also depend on whether you are affected by the Alternative Minimum Tax for that year and what your “other” taxable income is.

In general, everything you own for personal or investment purposes is a capital asset. However, there is a list of exceptions, mostly relating to property used in or sold by a trade or business (inventory, accounts and notes receivable, some intangibles, depreciable property and real estate used in a rental activity or business).

There are also many special tax rules that change whether an asset qualifies as a capital asset. For instance, the sale of patent rights may qualify for capital gains tax rates, depending on who sold it and whether some or substantially all the rights were sold. Sales of stocks, bonds and mutual funds may not qualify for capital gains tax rates if the seller is a dealer in those items.

Even if an asset is a capital asset, the tax rate depends on the type of capital asset. Specifically, collectibles (generally including works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages) are taxed at 28%. Part of the LT gain attributable to depreciation on real estate used in a rental or business activity (called Unrecaptured Section 1250 gain) is taxed at 25%.
After you have determined your gains and losses from your capital asset transactions, you then must determine your net ST and LT gains and losses. First, capital gains are grouped into Short-term (“ST”) and Long-term (“LT”). ST applies to assets held for one year or less and LT to assets held more than one year. Second, ST losses are netted against ST gains and LT losses are netted against LT gains.

If ST losses exceed ST gains, then the excess ST loss is netted against LT gains (first the 28% group, then 25% group, and last the 15/5% group). If LT losses exceed LT gains, the excess LT losses are carried forward to future years. Net ST gains are taxed at ordinary income rates. Net LT gains are taxed at 28%, 25%, 15% or 5%. Losses are deductible against “ordinary income” only for $3,000 per year (and $1,500 for married filing separately). Losses not deducted in the current year can be carried forward and used to offset future income.

When you sell capital assets, you should inform your tax advisor so that she can assist you in determining your tax liability to avoid a nasty April 15th surprise. Better still, BEFORE you sell the property, discuss your plans with your tax advisor to see what can be done to mitigate some of the tax liability (like-kind exchange, sell loss assets in the same year as gain assets, etc.

If you have any questions about this article, asset transactions that have already been done or planning for upcoming transactions, please feel free to contact me at TeriK@fctcpa.com

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