When you sell an asset like a home, car, investment, or jewelry, you may either realize a capital gain or a capital loss. A capital gain happens when you sell an asset for more than what you paid, while a capital loss occurs when you sell it for less. Capital gains are taxed based on your marginal tax rate. For those with a marginal tax rate of 10% or 15%, there’s no capital gains tax. Thankfully, there are several strategies to help reduce or even eliminate capital gains taxes.
If you’re selling your primary residence, you can exclude up to $250,000 of profit ($500,000 if married). To qualify, you need to:
This exclusion can make a significant difference when selling your home, so make sure you meet all the requirements before moving forward.
When selling your house, you’re allowed to add certain costs to the property’s base cost, like agent fees and transfer expenses. Moreover, the cost of major home improvements, such as building an extension or adding a swimming pool, can be included. By increasing the base cost, you effectively reduce your profit, leading to a lower taxable gain. Just remember, keeping all your receipts and supporting documents is crucial to substantiate these claims during tax season.
Near the end of the year, consider selling off assets that are worth less than their purchase price. This can help create a capital loss, which can then offset any capital gains realized in the same year. This practice is perfectly legal as long as you don’t repurchase the same stock within 30 days. Known as the “wash-sale rule,” it ensures that the loss isn’t claimed on assets bought back too quickly.
If you own multiple shares of the same stock bought at different times, you can choose which shares to sell. For example, if you’re selling 200 shares out of a batch of 1,000, opt for those with the highest purchase price to minimize your capital gain. Keep solid documentation of purchase dates and prices to support your strategy. This technique can help you stay on top of your tax planning.
For business owners, the Section 1031 exchange can be a valuable tool. If a business sells a property and uses the proceeds to buy another property, the transaction is treated as a “like-kind” exchange. This means the tax on the gain is deferred. However, keep in mind that capital gains tax will apply if the business sells the property and doesn’t reinvest in another one. This strategy is strictly for businesses, so plan accordingly.
Setting up a charitable trust allows you to transfer assets to a charity, avoiding capital gains tax while the assets grow in value. You can continue benefiting from the assets, but note that they will eventually go to the charity either after a set number of years or upon your death. This arrangement means your heirs won’t inherit these specific assets, so weigh the benefits before deciding on this approach.
Short-term capital gains are taxed at the same rate as regular income and apply to assets held for less than a year. These rates can range from 10% to 39.6%. Long-term capital gains, on the other hand, apply to assets held for more than a year and are taxed at a lower rate, typically between 0% and 20%. To take advantage of lower rates, aim to hold assets for at least one year before selling.
If you or your spouse anticipate a drop in income—such as a job loss or a planned career break—it’s an ideal time to sell assets. Capital gains tax is based on your marginal tax rate, so a lower income year means a lower rate on any gains. This approach can be a strategic move to reduce the tax burden when selling assets.
Reducing your taxable income can bring down your overall marginal tax rate. Maximize deductions and credits on your tax return, such as charitable contributions and eligible medical expenses. Another effective tactic is contributing to an IRA up to the maximum allowable amount. By lowering your income, any capital gains will also be taxed at a reduced rate, making this a win-win strategy.
One surefire way to avoid capital gains tax is by gifting the asset to a family member. Under current laws, you can give up to $14,000 per year ($28,000 for married couples filing jointly) without incurring gift tax. If the asset is sold later, the new owner pays the capital gains tax based on their own marginal rate. Keep in mind that this strategy doesn’t apply to dependents under 24, as they pay tax at their parents’ rates.