Options include holding investments for more than a year to benefit from lower long-term capital gains rates, using tax-loss harvesting and taking advantage of tax-advantaged accounts to reduce your taxable gains.
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.
You could: Stagger the sale of assets over several tax years to make the most of using your CGT allowance over several years. You could sell part of a share portfolio on 3 April and the rest on 6 April to take advantage of two years' CGT allowance. Offset any losses you've made on other assets.
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.
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.
As of 2022, for a single filer aged 65 or older, if their total income is less than $40,000 (or $80,000 for couples), they don't owe any long-term capital gains tax.
Deducting Home Improvements From Home Sale Profit
If you make substantial physical improvements to your home—even if you did them years before you started actively preparing your home for sale—you can add the cost to its tax basis. This will reduce the amount of any taxable profit from the sale.
“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.
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.
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.
Taxes aren't determined by age, so you will never age out of paying taxes. People who are 65 or older at the end of 2024 have to file a return for tax year 2024 (which is due in 2025) if their gross income is $16,550 or higher.
Portfolio management and capital gains offsets
For example, if you had a gain of $2,000 from the sale of Stock A, but saw a loss of $1,600 in Stock B, you could take the $1,600 loss and use it to offset part of your $2,000 gain. The net capital gain would then be only $400.
Expenses that are wholly and exclusively incurred in relation to the sale/ transfer of shares are allowed to be deducted from sales income classified under the capital gains income head. Expenses such as brokerage charges, stamp duty, exchange levy, etc., can be claimed as expenses on your Income Tax Returns (ITR).
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.
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.
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.