The Internal Revenue Service (IRS) keeps tabs on investments that are purchased and sold in order to tax capital gains. In some cases, real estate settlement agents may send an IRS tax form to the seller, post-sale if they were involved in the asset’s transaction. Real estate settlement agents are required to turn in these forms when they assist in any sale so that the IRS has record of it. Even if an agent does not send you an IRS form, you are still required to fill one out. Keep in mind that failure to report is a big deal, and the IRS has various strategies for sniffing out unreported capital gains.
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What Are Capital Gains?
Capital gains are profits earned through the sale of assets that have appreciated since the initial investment. There are some scenarios where assets depreciate, such as when driving a new car off the lot, and these scenarios represent capital losses.
Capital gains are categorized as taxable income but are taxed at a different rate than standard income is. The rate is also affected by how long the investment item is possessed. Short-term capital gains come from assets you’ve held for under 12 months, while long-term capital gains are taxed after 12 months. Short-term capital gains have fewer tax advantages than long-term capital gains.
Reporting Your Capital Gains
According to the Internal Revenue Service, almost all owned items (from stocks to jewelry) are considered capital assets subject to capital gains and losses. Examples of capital assets include:
- Businesses/Business property;
- Personal collections.
To calculate capital gains or losses, take the amount of money the initial investment was purchased for (adding any buyers fees) and subtract the amount of money the investment is sold for (minus any sellers fees).
There is a little bit of leeway with how capital gains are reported, however. The initial investment amount can be adjusted by providing documentation proving maintenance or improvement costs, such as renovations or other additions.
Capital gains are reported when taxes are filed. Aside from that, in order to report a capital gain, the seller needs the purchase price and date of the original purchase, as well as the sale price and date of the final sale.
What Is a 1099-S?
A 1099-S form is used to report the full amount of profit gained from the sale of an asset. If a real estate settlement agent sends this form to you it must be added to your return when taxes are being filed.
Do You Have to Report Capital Gains and File a 1099-S?
There are a few exceptions where capital gains and filing a 1099-S tax form are not necessary. In a lot of scenarios, housing may be exempt from all or the majority of capital gain taxation.
These scenarios include:
- If you have owned the home for a minimum of two years out of the five-year period prior to the sale.
- If the house sold was your permanent primary residence.
If you fall into these categories then there are two possibilities:
- If you are single, $250,000 of capital gain can be dismissed.
- If you are married filing jointly, $500,000 of capital gain can be dismissed.
If you are constantly buying and selling real estate as part of a short-term investment strategy, no tax exemptions are available.
What Happens If You Don’t Report Capital Gains or File a 1099-S?
If you don’t report capital gains or file a 1099-S there are consequences. First off, the IRS will default your capital gain to a more simple equation. To elaborate, no renovations or any type of accounting for capital losses will be taken in to account. The purchase price and the sale price are only included.
Failure to report, whether intentional or not, will put you at risk of IRS sanction. This leads to fiscal fines, penalties and in some cases criminalization. If the IRS can prove tax evasion or fraud the punishment can include time in jail.
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