Understanding Long-Term vs. Short-Term Capital Gains

Before buying or selling a large investment, you should always consider the ramifications of a capital-gains tax. This is a tax that is levied on the sale of an asset that is sold at a higher price than it was bought. Capital gains taxes are most often discussed during the sale of real estate or stocks that have appreciated in value, although there are many other instances when the tax may be charged.

Many investors do their best to avoid paying capital gains, and having a savvy financial advisor who is well versed in the tax code can help with such matters. For example, a qualified financial advisor can help advise on the best time to sell stock, or how much longer is necessary to hold onto a home before you will be charged “long-term capital gains” as opposed to “short-term capital gains.” There are even legal ways to defer the payment of capital gains taxes through various tax-planning strategies.

“Short-term capital gains” are those assets that are sold before a designated time period, while “long-term capital gains” refers to those assets that are sold after this time period. Short-term capital gains are taxed at the regular income tax rate, while long-term capital gains are taxed at a lower rate. For this reason, many investors will hold onto assets such as homes longer than they might have planned, as they wish to avoid paying higher capital gains.

A capital-gains tax might also be avoided in other ways. For example, if a homeowner uses the profits from the sale of a home to purchase another home, the capital gains tax might be waived, if certain rules are followed.

As with making any financial decision, it is always best to seek advice from a professional, such as an accountant or financial advisor. If you have further questions about this or other financial topic, you should seek the guidance of a qualified financial services expert.