A stepped-up basis is a tax provision that allows heirs to reduce their capital gains taxes. When someone inherits property and investments, the IRS resets the market value of these assets to their value on the date of the original owner's death.
“It is a simple fact that billionaires in America can live very extraordinarily well completely tax-free off their wealth,” law professor Edward J. McCaffery writes. They can do so by borrowing large sums against their unrealized capital gains, without generating taxable income.
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale of your investment property into a similar property.
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
Utilize tax-loss harvesting
This strategy involves selling underperforming investments and booking a loss. You can use these capital losses to offset taxable investment gains and up to $3,000 each year of ordinary income.
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $47,025 for single and married filing separately; $94,050 for married filing jointly and qualifying surviving spouse; and. $63,000 for head of household.
But when gains are inherited, the loophole zeroes out the gain for tax purposes. As a result, an investment sale that would create a taxable gain for the original owner is tax-free for the inheritor. Example: an investor buys 100 shares of stock for $200. Ten years later, the stock is worth $500.
To limit capital gains taxes, you can invest for the long-term, use tax-advantaged retirement accounts, and offset capital gains with capital losses.
Current tax law does not allow you to take a capital gains tax break based on your age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales, though this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
In short, yes, a Trust can avoid some capital gains tax. Trusts qualify for a capital gains tax discount, but there are some rules around this benefit. Namely, the Trust needs to have held an asset for at least one year before selling it to take advantage of the CGT discount.
Section 1061 imposes a three-year holding period as a precondition to recognizing long-term capital gains on carried interests issued to investment professionals, and otherwise treats the capital gains as short-term capital gains.
The seller, or at least one title holder, had to be 55 or older on the day the home was sold to qualify. Following the passage of the Taxpayer Relief Act of 1997, the exemption was replaced. As of 1997, there are new per-sale exclusion amounts for all homeowners regardless of age.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
To qualify for the principal residence exclusion, you must have owned and lived in the property as your primary residence for two out of the five years immediately preceding the sale. Some exceptions apply for those who become disabled, die, or must relocate for reasons of health or work, among other situations.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
The so-called 'Mayfair loophole' is part of the capital gains system and was agreed by the last Labour Government. It allows private equity firms to treat their profits as capital gains when there is capital at risk.
Social Security and capital gains
Keep in mind that up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains. The calculation that determines how much of your Social Security benefits are taxable includes realized gains.
What if I reinvest the proceeds? Buying additional stock shares with the proceeds from a stock sale will not eliminate or reduce capital gains taxes. However, if you reinvest the gain into a QOF (Qualified Opportunity Fund), you can defer the payment of capital gains taxes while you are invested in an eligible fund.
You can offset capital losses against your capital gains to reduce your total taxable income (gain). Once you've identified the right assets for tax loss harvesting and you sell them, the next step is offsetting capital gains with losses.