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.
Starting in 2025, single filers can qualify for the 0% long-term capital gains rate with taxable income of $48,350 or less, and married couples filing jointly are eligible with $96,700 or less.
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.
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.
However, thanks to the Taxpayer Relief Act of 1997, most homeowners are exempt from needing to pay it.1 If you're single, you will pay no capital gains tax on the first $250,000 of profit (excess over cost basis). Married couples enjoy a $500,000 exemption.2 However, there are some restrictions.
You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.
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.
“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.
An easy and impactful way to reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
In fact, many wealthy people can and do "live off the interest." That is, they put a chunk of their fortune in a relatively safe collection of income-generating assets and live off of that—allowing them to be more adventurous with the rest.
For example, in 2024, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or below. However, they'll pay 15 percent on capital gains if their income is $47,026 to $518,900. Above that income level, the rate jumps to 20 percent.
Seniors must pay capital gains taxes at the same rates as everyone else—no special age-based exemption exists.
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.
Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.
Second, capital gains taxes on accrued capital gains are forgiven if the asset holder dies—the so-called “Angel of Death” loophole. The basis of an asset left to an heir is “stepped up” to the asset's current value.
To grab the 0% tax rate, a single taxpayer can have taxable income up to $47,025 for 2024 and a married couple filing jointly can have taxable income up to $94,050 for 2024. If you expect your income to fall after retiring, you might be able to keep your income in the 0% tax rate territory.
If it's your primary residence
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.
By placing investments with higher growth potential in tax-advantaged accounts, like IRAs or 401(k)s, and lower growth potential investments in taxable accounts, you can potentially minimize your capital gains tax liability. Another important strategy is adopting a long-term perspective on investments.
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.
This tax-deferred exchange allows you to avoid taxes if you buy a new property within 180 days using the proceeds of the original sale. It works whether you're selling an investment property or a multifamily property that you also use as a primary residence.