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capital gains definition
the difference between the sales price and the original cost (plus improvements)
of property. Capital gains taxes can be a terrible financial shock to individuals
who bought a house or business many years ago for the going price and now find it
is highly valued, greatly due to inflation. Example a couple buy a house in 1950
for $20,000 (then a high price) and upon retirement want to sell it for $400,000.
There is a potential of tax on a $360,000 gain. There are some statutory cushions
to ease this blow, such as a one-time $125,000 deduction from the gain (profit)
on sale of real property if the seller is over 55, deferred (temporarily put off)
tax if investment property is "exchanged" (profits are invested in other property)
under strict rules, making lifetime gifts to children or charity, or buying another
home. Another escape is death, which gives the property to heirs at the value on
the day of the owner's death without capital gains tax ("stepped up basis"). Reduction
of capital gains tax rates has been resisted by a majority of Congress, partly because
lowering the rate generally would become a tax break for the wealthy.
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