How to Calculate the Net Effect on Taxes for Capital Transactions?
What is the net effect on Jason's taxes if he is in the 25% tax bracket?
Which of the following best describes the tax treatment for Gonzo regarding the sale of the vacation home?
Answer:
The net effect on Jason's taxes would be a $750 tax reduction.
The correct answer for Gonzo's tax treatment regarding the sale of the vacation home is $75,000 long-term capital gain.
For Jason's capital transactions, we need to calculate the net effect on his taxes. First, we calculate the net short-term capital gain/loss:
Short-term capital gain = $3,000
Short-term capital loss = $5,000
Net short-term capital gain/loss = $3,000 - $5,000 = -$2,000 (a short-term capital loss)
Next, we calculate the net effect on taxes:
Net capital gain/loss = -$2,000 + (-$2,000) = -$4,000 (a net capital loss)
Since Jason has a net capital loss and is in the 25% tax bracket, the tax reduction would be $750.
For Gonzo's tax treatment regarding the sale of the vacation home:
Gonzo's cost basis in the property is $325,000 and selling price is $420,000.
To calculate the gain on the sale of the vacation home: $420,000 - $325,000 = $95,000
Since Gonzo inherited the home and sold it, the gain is treated as a long-term capital gain, resulting in $75,000 long-term capital gain.