capital gains or losses

capital gains or losses n. particularly when calculating the tax liability of an individual or business, this is the difference between the original cost plus the cost of capital improvements, excluding maintenance, called "basis" and the sales price. Capital gains 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 buys 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 putting off the) 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 have been resisted by a majority of Congress, partly because lowering the rate generally would become a tax break for the wealthy. (See: basis, delayed exchange, exchange)