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In previous newsletters we defined the following investing terms:
· Assets and Liabilities
· Liquid and Illiquid Investments
· Real Estate as an Asset Class
· Simple Interest and Compound Interest
To continue this series, let’s take a look at two components of investment returns –income and capital gains.
Income is simply revenue earned as the result of owning an asset. If you own bonds (loans to companies), this will be listed on your statement as interest. For stocks (ownership of companies), you will see dividends. If you own real estate, the income is generally in the form of rents. This type of investment return is taxed as ordinary income when you receive it.
Capital gains represent the value of appreciation an asset experiences while you own it. If you hold a bond until it matures, you typically will not experience capital gains. Stocks and real estate often have appreciation because the asset becomes more valuable over time if operated effectively. This gain is taxed when you sell the asset.
In terms of giving, appreciated stocks and real estate can be great options since in addition to receiving an income tax deduction for the fair market value of the gift, you avoid the capital gains tax.
