Most Americans know that income they earn from a business or in an employee paycheck must be reported to the IRS as potentially taxable income. But what about your personal assets? If you sell something of your own and make a profit, is this taxable on your income tax return? On the other hand, can a loss be used to reduce taxable income? Here's what you need to know about personal property sales.
Any Capital Gain May Be Taxable
Generally, any profit from selling a capital asset (items of significant value that are usually held for multiple years) is subject to taxes. This includes personal investment items like antiques, collectibles, stocks and bonds, real estate, and equipment. It even includes the family car.
Many Personal Sales Are Losses
However, in reality, many of these sales don't result in tax. This is because you can deduct more than just the amount you paid for the item before determining profit.
The tax basis includes the purchase price but also taxes, improvements, some major repairs, shipping, insurance, and other costs. If you purchased your car for $10,000 and spent $2,000 on these other expenses over the years, a sale for $11,000 results in a net loss rather than a taxable $1,000 gain.
Personal Losses Can't Be Deducted
The bad news is that you can't deduct the loss on most personal assets to reduce other taxable income. This includes that loss on when trading in your old daily use car.
An exception is made, though, for items intended to be held for investment. If you bought an antique car with the intent to restore it and sell it for a profit, this becomes an investment transaction rather than an incidental personal transaction.
So if you lose money on that investment car, you may indeed be able to deduct the loss on Schedule D (Capital Gains and Losses) along with losses from non-retirement investment accounts and individual stocks or bonds. These may offset your other taxable income.
Home Sales Have Unique Rules
One outlier to the rules about personal asset sales is your primary home. When a taxpayer sells their primary residence — which usually results in a profit — they are allowed to exclude the first $250,000 ($500,000 for married taxpayers) of profit.
Your Tax Preparer Can Help
Many taxpayers don't know when to report money earned from unusual sources such as selling their car or their baseball card collection. So the best place to begin is to meet with an experienced tax preparation service in your state. They will work with you to identify any obligations resulting from your sale and minimize any taxes due. Make an appointment today for tax services.
