A capital gain is the positive difference between the sale price and tax basis, usually the initial cost, of a personal asset. All capital gains earned must be reported to the Internal Revenue Service on Form 1040 and certain accompanying schedules. Form 1040’s Schedule C is used to report profit or loss from a business, including income and expenses from rental property. Capital gains are not considered part of rental income, however, and are not reported on Schedule C.
Capital Gains on Form 1040
Individuals must report capital gains for income tax purposes net of any capital losses incurred during the tax year. The net capital gain or loss must be reported on line 13 of IRS Form 1040, and you also complete Schedule D and Form 8949, Sales and Other Dispositions of Capital Assets. If you meet certain exceptions, it is possible to report capital gains only on Form 1040 without having to attach Schedule D or Form 8949.
Capital Gains on Schedule D
Schedule D has three parts, and the form distinguishes between long-term and short-term capital gains and losses. Long-term capital gains or losses are earned from the sale of assets held for one year or longer. Short-term capital gains or losses are earned from the sale of assets held for less than a year. All capital gains and losses for a tax year are added together to arrive at a net capital gain or loss amount. This result is reported on line 16 of Schedule D and carried over to line 13 of Form 1040.
Rental Property and Schedule C
A taxpayer who owns rental property completes Schedule C when she provides “substantial services” to her tenant. The IRS defines “substantial services” as “regular cleaning, changing linen, or maid service.” If you meet these criteria, you need to report your rental income and expenses on Schedule C. Nevertheless, capital gains are not part of rental income because they do not arise from residential rental activity, and they are not reported on Schedule C.
The Internal Revenue Code is extremely detailed and full of a wide variety of examples and exceptions that can apply to an individual taxpayer. Be aware that tax laws also change every year. A tax professional can provide the latest information and direct assistance on your particular tax situation.
Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.