Using 1031 exchanges and qualified opportunity zones to reinvest the proceeds from the sale of an appreciated asset can defer and sometimes eliminate capital gains taxes.
Reinvest in new property
The like-kind (aka "1031") exchange is a popular way to bypass capital gains taxes on investment property sales. With this transaction, you sell an investment property and buy another one of similar value.
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.
Use a 1031 Exchange
A 1031 exchange, a like-kind exchange, is an IRS program that allows you to defer capital gains tax on real estate. This type of exchange involves trading one property for another and postponing the payment of any taxes until the new property is sold.
1031 exchange
Known as a like-kind exchange, it only works if you sell the investment property and use the proceeds to buy another similar property. You're putting off capital gains tax indefinitely; if you keep putting the sale proceeds into another investment property, you can avoid capital gains taxes.
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets.
Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
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 moved out of their PPOR and then rented it out.
If the home is a rental or investment property, use a 1031 exchange to roll the proceeds from the sale of that property into a like investment within 180 days.13.
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.
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
Do I Have to Pay Capital Gains Taxes Immediately? In most cases, you must pay the capital gains tax after you sell an asset. It may become fully due in the subsequent year tax return. In some cases, the IRS may require quarterly estimated tax payments.
Capital gains tax rates
Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than 15% for most individuals.
If this is you, and you hold your funds in a tax-deferred or tax-exempt account (most retirement accounts) it's probably best to have the capital gains automatically reinvested for you. Why let cash build up when it could earn more money invested in the market? Let those gains make you more gains!
Utilizing a Deferred Sales Trust, investors can defer capital gains taxes over time. Deferred Sales Trusts provide an alternative to 1031 exchanges for deferring capital gains taxes on appreciated assets.
You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
The taxpayers can minimize or avoid paying tax by reinvesting capital gains from residential house property under the Income Tax Act, 1961. The taxpayer can either reinvest the capital gains in bonds or in a residential property. The taxpayer needs to fulfil a few conditions in both of the options to gain tax benefits.
But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate.
Taking capital gains in different years
Another option to discuss with your tax professional may be to “spread the sale over multiple tax years — that can help ease the burden,” says Jonathon McLaughlin, investment strategist for Bank of America.
Income limitations: Selling your home does not directly impact your eligibility for Social Security benefits. However, if you earn income from the sale, it could potentially affect the taxation of your benefits or eligibility for certain assistance programs.
If you have owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.
In this case, you could exempt up to $250,000 in profits from capital gains taxes if you sold the house as an individual, or up to $500,000 in profits if you sold it as a married couple filing jointly.
Long-term capital gains can't push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you're seeing significant growth in your investments, you may want to consult a financial advisor.