Capital Gains Tax Rules - Should we know them?

Know The Rules? - Make The Rules!

July 26, 2004
Bogdan Voicu

Capital Gains Tax Rules are sometimes hard to understand. Still, you should try to understand them in order for you to save a lot of money. The present rules are active since 1997, when president William Clinton signed the Taxpayer Relief Act. In 2003, George W. Bush signed the last capital gains tax law (Jobs and Growth Tax Relief Reconciliation).

Maybe the most important Capital Gains Tax Rule is the primary residence exception. This allows you to be excepted form paying the tax for $250.000 (or even $500.000 for married couples). This means a big money save, isn't it?

What is the capital gains tax, actually? Capital gains tax is a tax charged on capital gains, which is the difference between the price of sale and the price of purchase (including improvements). Capital gains tax laws establish the main elements to be considered when you calculate your capital gains tax. The most important of all is the period of time you held the asset. The percent decreases a lot after the first year of possession. This way, the laws encourage the long-term investment in valuable assets.

A more important rule is that starting from 2008 the capital gains tax rate for long-term investment would decrease to 0. It actually means that any asset held for more than a year will be capital gains tax-free.

It is very good for you to know the exceptions that you may use in order to save money. The real estate properties are subject to the most important exceptions: the primary residence one (that is mentioned above) and the home-based business owners.

All and all, the rules that determine the capital gains tax should be known by all of us. This way, we will not have to pay the Federal Government more than we should. And, a lot better, we get to keep those money.