Capital gains taxes often don't apply to homeowners

A chain e-mail accuses Sens. Hillary Clinton and Barack Obama of wanting sharp tax increases, while praising Sen. John McCain for holding the line. ( Click here to read the chain e-mail in its entirety .)

The e-mail asserts that Clinton and Obama want to raise capital gains taxes and dividends taxes, as well as raise tax rates for all income levels . We'll look at the capital gains taxes claim here.

So what is a capital gains tax? The Internal Revenue Service explains: "Almost everything you own and use for personal purposes, pleasure or investment is a capital asset." When you sell an asset for a profit, that profit margin is your capital gain, and the IRS taxes you on it. Capital gains taxes vary depending on the income level of the tax filer and the length of the investment, with separate tax rates for short-term vs. long-term capital gains.

Here's what the e-mail says about capital gains taxes:

"CAPITAL GAINS TAX

MCCAIN

15% (no change)

OBAMA

28%

CLINTON

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"How does this affect you?" the e-mail asks. "If you sell your home and make a profit, you will pay 28% of your gain on taxes. If you are heading toward retirement and would like to down-size your home or move into a retirement community, 28% of the money you make from your home will go to taxes. This proposal will adversely affect the elderly who are counting on the income from their homes as part of their retirement income."

The item lists 15 percent as the current rate, and that is a correct number for long-term capital gains for higher income brackets. Obama has said he would raise the capital gains tax rate to somewhere between 20 percent and 28 percent, depending on how much he needs to pay for his health care plan. (The long-term rate was generally 20 percent prior to the Bush tax cuts.)

After we received this e-mail, Clinton addressed the capital gains tax in some detail at a debate in Philadelphia on April 16, 2008.

"I wouldn't raise it above the 20 percent if I raised it at all," Clinton said, adding, "I'm going to have to look and see what the revenue situation is."

We talked with a spokesman for a business-backed tax policy group and he said he expects either Democrat would raise the capital gains rate.

"Unless they just go back on all their campaign promises to raise taxes on high-income people, these are the taxes that they're talking about," said William Ahern of the Tax Foundation, which advocates for a transparent, progrowth tax code.

But there's another problem with the e-mail's statements, specifically the implication that all home sales are subject to the capital gains tax. Many home sales are exempt from the capital gains tax. As long as they meet rules requiring that they've lived in their home, homeowers don't have to pay the capital gains tax if the profits on their home are less than $250,000 for a single person or $500,000 for a married couple. The rule applies to workers and retirees alike, said Eric Toder, a tax policy expert with the Urban Institute in Washington, D.C.

To summarize, the e-mail is right that Obama wants to raise the capital gains rate, though it pegs the high end of a range he's suggested. Clinton, meanwhile, would consider raising it to 20 percent, not the 24 percent stated in the e-mail. It's also important to note that because the tax code allows for significant capital gains on a homestead before capital gains taxes are levied, most homeowners are exempt. In the end, the e-mail's statements on the capital gains tax are more wrong than right; we rate it Barely True.

Update: This statement has been updated to reflect comments the Democratic candidates made about the capital gains tax at a debate in Philadelphia on April 16, 2008.