Capital Gains: Investment Property Counts, Not Personal-Use Property

Tax law differentiates between investment property and personal-use property. When you sell investment property, you must report the sale and pay tax on your gains. You can also deduct your losses with regard to investment property, but not on personal-use property.

This is property you purchase and keep in hopes it will increase in value, so you can sell it at a profit.

Examples of investment property include stocks, bonds, collectibles, antiques, works of art, and real estate.

As a general rule, you don't use your investment property in day-to-day life; that's personal-use property. Here are two examples that show the difference:

• You buy a vacation home. While you hope that it appreciates in value so you can sell it at a profit, your primary reason for owning it is to use it for getaways. That makes it personal-use property.
• You collect baseball cards. You hope that your cards will appreciate in value so you can sell them at a profit. While you take your cards to collectors' shows and display them, and look through them regularly, your collection is considered investment property because you don't use it in your day-to-day living.

Items you own and use in your day-to-day life are considered personal-use property.

You don't hold personal-use property with the intent of making a profit, and you don't use it in your business or rental operations.

Examples of personal-use property include your home, furniture, clothing, and vehicles.

Most of the time, you would need to report a sale only if you make a profit on it. For example, if:

• You sold your 1999 automobile for $15,000. You originally purchased it for $2,000 and made no permanent improvements to it. By law, you are required to report a $13,000 gain on your tax return.
• You sold your 1992 automobile for $2,000, having originally purchased it for $20,000. The law says you cannot deduct a loss on a personal-use property, and in this case you're not required to report the sale.

There is an important exception to reporting the sale of personal-use property: when you have a loss on real estate you use personally. The sale of your personal residence is always reportable, whether you have a gain or loss. You can not deduct a loss on your personal residence, however.

Report the sale on your tax return if you received a Form 1099-S. When you enter the information for the sale, select  Personal Loss, and TurboTax will not calculate the loss deduction.