Sorting Out Tax Consequences Of Asset Sales

If you sell something for a profit, you can expect the government to take its cut.

Accountant/blogger Amber, writing at Money Under 30, identifies what sales will and won’t ding you on your tax return. Some highlights from the post:

*You probably won’t have to pay taxes on a home sale. If you lived in the residence for two of the last five years, you can exclude up to $250,000 — or a cool half-mill if you’re married and filing jointly — of the gain from your sale.

*When you sell stock, you’ll be taxed on the gains and can deduct the losses. But just because a stock you own nose-dived doesn’t mean you can write it off. You can deduct up to $3,000 in losses per year on not-so-wise investments.

What are your biggest concerns about next year’s tax return?

Gains & Losses: What Will Be Taxed and What Can I Claim? [MoneyUnder30]

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  1. huadpe says:

    My biggest concern about next year’s return is the lack of tax cat on this post.

  2. Bativac says:

    I realized early this year that I can deduct state sales tax as an itemized deduction. I started saving receipts in February. Is there a limit to this deduction that anybody is aware of?

    • frank64 says:

      I think you have a choice between sales or state income tax. If you don’t have state income tax, than sales tax it is!

    • Taed says:

      You can either deduct the state sales tax OR the state income tax. If you live in a state with income tax, then your income tax is probably higher. However, in a state without income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), then saving recepts is certainly what you want to be doing.

      But you only get that benefit if you itemize deductions. The standard deduction is $5,700, so you’d need to top that before you see a benefit.

      As far as limits go, there really isn’t one, but there’s a slow itemization phaseout as you get up past $170,000 or so. I don’t recall the specifics on that, though. I think that phaseout actually ends this tax year, though.

    • Bativac says:

      Thanks guys. I’m in Florida so we don’t have state income tax, thank goodness. I’ll be itemizing this year due to mortgage interest.

      Reading the IRS website, it looks like I can also deduct property taxes. Is that correct?

    • TuxthePenguin says:

      There is no limitation on the amount of STATE sales tax you can deduct IF your state does NOT have an income tax (Texas being the normal, textbook example). If you keep all your receipts, you can claim the exact dollar amount. If you don’t have your receipts, there is a table that will calculate the “average” sales tax paid by your income.

      If you’re going to go the itemized route, I’d highly recommend a CPA (full disclosure – I am one) just to make sure that you’re covering all your bases. There are a few other ways which you can try to calculate your state sales tax paid (aggressive tax strategies). In addition, once you get to that point that itemized > standard, a CPA might be able to help you find more. I’d recommend doing your taxes on your own but not submitting. Take those forms and documentation the CPA and offer the following “Any dollar amount higher than this one (the one you did yourself) I’ll give you 50/75% of the extra you find me”. Some will say no – I started my practice by making that offer exactly. No extra risk for you – its all on that CPA.

      • Sam2k says:

        You suggestion is a violation of the AICPA’s Code of Professional Conduct. A CPA may not for a contingent fee prepare an original tax return.

        • TuxthePenguin says:

          There are many, many corporate tax firms out there that do this exact thing (Ryan and Company, for one, does this with state sales tax).

          Now that you mention it, I’ll call them and ask. That’s a really, really good question.

      • rqb1018 says:

        Charging a contingent fee is an ethical violation. I would not recommend taking your taxes to a CPA who charges anything on a contingency basis.

  3. Torchwood says:

    I heard that something big is happening on Tuesday, November 2nd. This is something that I’ve been told is very very important. One guy even told me that it was my civic duty. Hmmmm….. now what was it? Go have a erection? How is that a civic duty?

    Tuesday, November 2nd must not be very important day. Now, American Idol, that’s important. Of course, I missed an episode when I was filing my taxes last April. And you know how important that the government gets their money.

    Geez, I can’t recall why Tuesday, November 2nd is important.

    • wrjohnston91283 says:

      New Weezer album release.

    • Duke_Newcombe-Making children and adults as fat as pigs says:

      If you’re under the impression that if the “right” party with an R at the beginning of their name will swoop down and “save” you from paying the same taxes in the future than you did last year, allow me to disabuse you of that notion. Unless, of course, you’re one of the top 2% of earners in this nation, or a corporation. Then, I stand corrected. Otherwise, you’re just another sucker like the rest of us.

      • frank64 says:

        What them R’s want is not to stop the 2% from paying taxes, it is just to stop them from having to pay a more than they do now. Even under the R’s tax plan they will still be paying 35%. All this talk is just about the extra 4%. Even the 35% is higher than the poor pay. I am NOT saying the poor should pay 35%. I am just stating the real numbers. For the rich, more is not enough, it needs to be more+4%.

        Disclaimer: I nor anyone in my family is rich.

        • frank64 says:

          I realize I am talking marginal rates.

        • Coelacanth says:

          Well, I assume that a significant portion income derived from the upper classes come from long-term capital gains and dividends – which may be taxed as low as 15%… which is lower than most middle class family’s marginal tax rates…

          • frank64 says:

            Where did they get that money that they invested? Somehow, it was already taxed. The cap gain taxes are designed to encourage investment. If you want to discuss changing that, you have to look at the consequences, but for the most part that is not being discussed.

            That must mean you are OK with the 35% then?

          • frank64 says:

            I was talking about normal taxable income, you ignored that part to go to investment income. Fair enough, but in the complicated world of taxes doing that makes conversation difficult, when one can skirt around without dealing with the point at hand.

            Buffet has mentioned his secretary being taxed at a higher rate than him. This is due to his income being mostly capital gains. To the extent that this was money he risked, we may all benefit from this part of the code. To the extent he was able to earn the lower rate using other peoples money, IF he was(such as hedge fund managers), then I would agree that it should be taxed as ordinary income. It however is a separate issue than ordinary income. To your point that “the rich” income is more from cap gains, than maybe the ordinary income top rate should stay at 35%?

            • Eifnor says:

              I believe he was referring to his Secretary paying an aggregate tax rate of 30 percent, while Mr Buffett only paid 17.7% percent.

              This is mostly due to two factors, Social Security Taxes apply to all of his Secretary’s income, were as, Mr Buffett only pays SS Taxes on the first $106,800 he makes. Second would be the favorable tax treatment of dividends and capital gains, (15% Federal for long term gains and dividends, and no Medicare tax on any).

              Mr Buffett stated he felt the system was unfair and I tend to agree.

              • frank64 says:

                SS taxes are capped, as is the benefit. Seems fair, a retirement plan should have the price in line with the benefit, as it is. Mr. Buffet’s SS benefits will not be anymore than if he put in the amount that is capped, right? I know SS is more complicated than that, but the cap has a relationship to the benefits, and I try to separate the issue when talking about general taxation.

                As I said before, professional money managers get cap gains and divs from investments made by clients. I agree this is wrong, and that they should pay taxes as if it was ordinary income. I don’t know why this hasn’t been changed, I am sure it is politics.

                Again, you are talking about investment income, and there is a credible reason for the lower tax rate on cap gains and divs. There is risk that these funds could be lost, the deduction on losses has limits, and some of the gains are eaten up in inflation(important in some periods). The dividends were already taxed as corporate income. Most of all, the lower investment income rates are to encourage investments.

                If a person is in a lower tax bracket, the cap gain tax rate is 0%, so conceivable if Mr. Buffets secretary earned cap gains, he would pay nothing. Comparing cap gain rates and ordinary income is an apple and oranges comparison. If you want to raise the cap gains rates on just the rich, there might be negative consequences. It could meet your definition of fairness, but it could also make you poorer, because less capital investment could mean less jobs.

                Still haven’t dealt with the ordinary income rates though. One problem with internet discussions.

                I like the idea of a flat tax too. The rich would pay more because xx% of 500K is much more than xx% of 30K, especially with a standard deduction. They would pay more, and get to deduct less. We would all be in it together too. No more saying “I think it should be provided for us, and the rich should pay for it”. If we all pay something, it could change the discussion a bit.

                • Nigerian prince looking for business partner says:

                  “SS taxes are capped, as is the benefit.”

                  I believe the cap makes total sense if all FICA taxes were earmarked entirely for SSI spending. But in reality, any FICA surplus is just applied to the general budget, resulting in it being an incredibly regressive income tax.

        • Happy Tinfoil Cat says:

          I’ve been extremely poor and I’ve been wealthy, so I’ve seen it from both ends. The only fair method is a flat tax, or possibly a flat tax on income above poverty line. The next step would be to force the government to print all the money it spends more than it brings in. The only way I can think of to get out of the ‘inflation tax’ would be to jump to other currencies.

    • Loias supports harsher punishments against corporations says:

      Free Denny’s breakfast I think.

  4. apd09 says:

    what great timing, my wife and I are talking about selling a piece of land that we own and were wondering what type of tax issues we might have. I have finally gotten her to agree that paying property taxes on a plot of land that we do not live on is not worth it when we can sell and pay off all our debt and put the rest of the money into a money market account and in 5 years we will have more money than the land is worth right now.

    • catastrophegirl chooses not to fly says:

      do you own the vacant lot next to my house? if so, i’d like to talk to you about it…..
      actually i know who owns the lot next to me and i’m hoping that in a year or two when i can get a loan, they will sell when i call them up and make an offer.
      the county tax records says they are paying their property taxes on that vacant piece later and later every year which tells me they might be having the same thoughts you are

    • Commenter24 says:

      IIRC, the tax exemption only applies to your primary residence, not to “investment” property. You’ll likely have to pay full income tax on the land.

  5. Happy Tinfoil Cat says:

    I have a tax-tale of woe. I joined a tiny startup and got a lot of 10¢ options. Eventually, the stock was selling for over $200. I decided to exercise and hold them since our meteoric rise showed no signs of slowing and people in-the-know were predicting $900/shr and could save with the ‘long term’ tax. It was in a blackout period which prevented me from selling anyway. Worst mistake of my life. The demons at the IRS have concocted a thing called AMT which meant I’d have to pay millions of dollars in tax even though I had not sold anything or even made a penny. I’d have to pay tax on the difference between the option price and the value of the stock on the day exercised. That was, unless I sold the stock by the end of the year. The bubble burst and the stock took the largest plunge in the history of the stock market, the stock dropped 120 pts in one day. When the window finally opened in early December, I sold it all at $15/shr. which saved me from the dreaded AMT. We had a very bad quarter as the market had crashed and all orders were canceled. For the first time in our company history, we made a pre-announcement as required by the SEC and the stock dropped even further to $5. This also meant that the lockout window was opened early the last week of the year. I had just sold all my stock at $15 and now was planning to buy it all back at $5 because I knew the company had a product that was awesome (cable modem). The night before the window opened early, my CPA sent out an email as a general info about ‘wash sales’. It prevented me from making that horrific mistake. If I had bought the stock back, the IRS would have demanded several million dollars from me on money I never made due to AMT.

    I am all for a flat tax now. The encyclopedic volumes of tax loopholes should be abolished. All the tax adjusters and Enron-style corporate monkeys can be put to death for all I care since they are just using up our air. They are no longer needed with a flat tax.

    • Happy Tinfoil Cat says:

      I also lost a LOT of money on other stocks. Still had to pay $120K in tax as the losses can only be written off $3K per year. The thing the article doesn’t say is, you can only carry a loss for 10 years. That means that if you lose more than $30K you will never be able to write it off. I told my CPA, “Guess I will just have to make a lot of money this year” and I did, using up the loss.

      I don’t think it is fair the IRS can charge tax but not allow write-offs. Reversing the rule would mean I’d only have to pay tax on the first $3K I make each year. And I’m still annoyed about AMT where they can charge you millions in tax on money you never even made.

    • Loias supports harsher punishments against corporations says:

      God, I wish I did anything in my life that required me to use such large numbers…

  6. CapZap says:

    When I was in my mid 30′s I started investing in commercial real estate. I understood our local market and felt I could make good decisions — and I did. Good properties that paid for themselves plus provided extra income. Good tax deductions for depreciation gave me years of uber low tax bills. Then I made a career and geographic change and sold the properties at a profit. Recapture of depreciation was a killer. Even with taxes at capital gains rates, the tax bill was a killer. Never thought that far ahead when I was young and picking investments. Probably wouldn’t have patted myself on the back so much had I the benefit of better foresight.
    Another one: one of the properties had underground gas tanks. When I bought it, there was no Dept. of Environmental Quality in my state and no one ever worried about leakage. Before I sold, one of the better off oil distributors in my town was driven to the point of bankruptcy because of underground leakage abatement. Impossible to protect yourself from such unforseen changes in the laws. I was lucky and sold to a major fuel distributor who removed the tanks and sterilized the soil at their own cost.
    A friend, aged 74, build a 3000 sq. ft. vacation home on one of the most beautiful bays on the West Coast. He took out a small mortgage to finish constuction. The property has everything — but can’t be sold in the current market. Result? Chapter 13 bankrupty. He did everything right, ended up in huge trouble, and is now looking for a job.
    A former business partner invested everything in the stock market, which gained enormously in the 1990′s. He laughed at me for having CD’s. Then the market tanked in the late ’90′s and every bit of gain he made was gone. He did the right thing and ended up a loser. And it was worse in 2007. Diversifying one’s investments is so important. Just rambling here.

    • Bativac says:

      Wow, thanks for the stories. Sometimes I wonder if I’m doing the right thing with my investments, which are pretty conservative. Stories like yours convince me that I am not cut out for any kind of risky investing.

  7. HogwartsProfessor says:

    Wait wait wait wait wait. So if I have a garage sale (personal), I have to pay taxes on my profits? If I sold my antique armchair to some schmoe on Craigslist for $200 I have to pay taxes on that? Is there a minimum on which I do not have to pay taxes?

    This blows!

    • Tongsy says:

      In theory yes.

      Practically, no. The government isn’t going to come after you for the tax on a 200 dollar armchair

    • Kimaroo - 100% Pure Natural Kitteh says:

      Isn’t it not really profit when you’re selling something below the price you paid for it?

    • RulesLawyer says:

      “If I sold my antique armchair to some schmoe on Craigslist for $200 I have to pay taxes on that?”

      You’re required to pay taxes on all income, from whatever source they may be derived, unless there’s an exception written into the tax code. If you find a dollar on the ground, if you win a dollar at a slot machine, if you steal a dollar from a kid on the playground, or if you make a dollar selling a widget, that dollar is taxable income.

      You’re getting rid of a chair that you paid $X for for $200. Assuming that you’re not able to claim the depreciation of the chair, if you bought the chair for $199, that’s a dollar of taxable income that you’re required to report.

      If you didn’t pay for the chair, but instead found it on the street, then you should have reported the value of the chair as taxable income in the year you came into possession of the chair.

      Realistically, however, it’s unlikely that the IRS is going to care about your chair, because if someone paid $200 for it, that’s probably the fair market value of the chair, and you broke even on the deal.

      • Happy Tinfoil Cat says:

        Even if you paid $799 for the chair, you still need to pay taxes on the $200. It is a sales and USE tax. Even though all the taxes were fully paid on the original purchase, the government still requires tax on any sale, barter or trade. One of the places I lived had a tax collector going to all the garage sales and forcing people to pay tax. The funny part was, he worked M-F and most the garage sales were Sat-Sun, hehehheh.

  8. dush says:

    My biggest concern is if they don’t fix the AMT and don’t extend the tax cuts.