Deductions

• One of the most common deductions from capital gains is capital losses. Typically, when you buy a product, selling that product for more than you bought it for is a capital gain. If you sell it for less than you bought it, then you have a capital loss. That loss may be deducted from your taxes, which could reduce or perhaps eliminate the amount you would owe in capital gains.
  
  

Rules

• Investors typically are the ones most likely to deduct capital losses from capital gains. Generally, taxpayers are able to deduct the amount of capital loss up to the amount of capital gain, with an additional maximum of $3,000 added on if the losses exceed gains. This means that if a taxpayer has capital gains in one year of $15,000 and capital losses of $18,000, the entire amount may be deducted. If the capital losses are $20,000, $18,000 could be on one year's taxes, with the rest of the loss carried forward to the next year.
  
  

Determining Deduction

• To figure the deduction for capital losses, add up all the losses and gains and put them on Schedule D of the tax return. If the losses are equal to, or exceed, gains, then the taxpayer will owe nothing on capital gains for that particular year. If the losses do not exceed gains, then the difference between the gains and losses can be deducted.
  
  

Exemptions

• One of the biggest questions taxpayers may face about capital gains is whether they must declare a capital gain if they sell a primary residence. Typically, primary residences are exempted from capital gains. Conversely, if you have a primary residence that is sold at a loss, that cannot be deducted as a capital loss. A person may exclude $250,000 in gains from the sale of a private home, or $500,000 if married and filing jointly.
  
  

Primary Residence Rules

• The IRS has a number of rules to determine whether the primary residence is exempt from capital gains. Generally, to claim a home as a primary residence, taxpayers should own the home for at least two years and have lived there for that same period of time. Also, taxpayers should not have claimed an exemption on another home as a primary residence within two years. If living in the home less than two years, it may still be possible to claim an exemption at a reduced rate.