First Person: Taxes and Garage Sale Proceeds

As spring begins to slowly arrive across the country, garage and yard sales begin to pop up around neighborhoods every weekend. As a tax accountant, I'm often asked whether the proceeds made from a yard sale must be reported on your income tax return as business income. The simple answer is that, if you are selling things from your house that you have owned for personal use, it is likely not taxable. Here is a run down of the rules:

Selling personal use assets generates a capital gain or loss.

When you sell something that you have previously used in your personal life, such as clothing, kitchenware or a lawnmower, the difference between what you purchased the item for and what you sell it for is considered a capital gain or loss. In almost all instances of selling personal goods, the sale will result in a capital loss. There are restrictions on claiming such a loss and, in most cases, you probably have not kept the receipts for the original purchase. So, yard sale proceeds on these types of items are not taxable.

Selling valuable artwork, antiques or collections can result in a taxable capital gain.

The exception to the above rule occurs when you sell something valuable, regardless of how long you have owned it. If you bought a painting, for example, five years ago for $150 and you sell it this year for $525, you have a capital gain of $375. This amount must be reported on your tax return as a capital gain but will likely fall under your capital gains exemption limit, meaning that you will not pay capital gains tax on it. For this reason, when you purchase antiques or artwork, be sure to keep the purchase receipts in a safe location in your home.

Buying and re-selling items qualifies as business income.

If you go out and purchase items to re-sell at yard sales, that is considered a business and the net profit generated from that activity is taxable as business income. This rule applies whether you are buying and selling on your front lawn or online through an auction site. If you are considering buying something, using it once and then selling it in order to get around this rule, the IRS is on to you. They look at the volume of sales or number of yard sales that you hold to give them an indication of whether the sales represent business activities.

Consider donating used goods to charity rather than holding a yard sale.

If you still want to make money from your used household goods but don't want to bother with a yard sale, you can itemize the goods and donate them to a charity such as Goodwill or the Salvation Army. You will get a tax receipt for the donation and, often, the value estimate of the item is far more than you would have received at a yard sale. You may save more in taxes than you would have received in cash from a yard sale. Nothing remains unsold and you don't have to stand on your feet for hours.

More From This Contributor:
Renting Versus Buying a Home: What Makes Sense in This Uncertain Economy?
Most Commonly-Missed Tax Breaks
Is Your Teenager Money-Savvy Enough to Go to College?