Most people mentally check out as soon as they hear the word “tax.” But if you own property or have investments you want to sell, you might want to tune in, or capital gains tax could cost you. To keep it simple, you experience a capital gain when you sell something for more than you bought it for. That’s why it often comes up in regards to selling a home. For example, if you purchase a house worth $200,000 and, thanks to an improved housing market (every homeowner’s dream), it sells for $300,000, you’ve got a capital gain of $100,000 on your hands.
Thankfully, there are strategies you can implement to defer capital gains taxes and make the most of your sold asset. Here’s what you need to know.
1. There Are Two Types Of Capital Gains Taxes
As if taxes weren’t complicated enough…we have to have two kinds of capital gains tax to grapple with! A short-term capital gainis from the sale of an investment you’ve had for less than a year. Anything over that is considered a long-term capital gain. The short-term capital gains rate is the same as your regular income tax rate and the long-term rate is between 0-20%, depending on your tax bracket.
Let’s say you are in the 24% tax bracket and you sell a long-term investment for a gain of $50,000. You will be taxed the long-term capital gains tax rate of 15%, compared to the 24% you’d be taxed if you owned it for less than a year. (1) That’s why holding onto your property or investment so you make it past that one-year mark could save you thousands of dollars.
2. You Have Control
We normally think of taxes as a necessary evil, but in this case, you get to determine when you pay capital gains taxes. We’ve already discussed how you can hold onto your asset longer to lower the taxes, but you can also choose to sell when it’s most advantageous for you. If you have winning stocks, you can hold onto your profitable investments indefinitely or sell in a year when your taxable income is reduced, either when you retire or through methods such as increasing charitable giving, making maximum contributions to retirement accounts, and paying for expensive medical procedures.
3. Real Estate And Businesses Have Different Rules
If the asset in question is real estate, you may be in luck. Currently, homeowners can sell and exclude up to $250,000 (for single tax filers) or $500,000 (for those who are married filing jointly) of the gains if you owned the property and lived in the house for at least 2 of the 5 years prior to selling it. Even better, you can claim this exclusion on another property in the future, as long as it’s been more than 2 years since you previously claimed it.
Business profits are also excluded from capital gains tax and instead are subject to business tax rates. In general, capital gains taxes apply to the sale of personal assets. Your business income is reported differently on your tax return and won’t face capital gains taxes.
4 .You Can Use Your Losing Assets To Your Advantage
Tax-loss harvesting is a strategy that allows you to offset your capital gains by capital losses. If you own a losing bond, mutual fund, or stock in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses and thus lower your taxable income. And if you live in a high-tax state, you may want to defer tax by deducting up to $3,000 of capital losses in excess of capital gains and carrying any leftover capital losses forward into future years. (2)
Do You Have More Capital Gains Questions?
It’s likely you do. There are many alternative strategies for those who want to offset or defer capital gains taxes or need to structure their income in a way that minimizes taxes. Luckily, you can pass your tax headaches on to us at Nichols Financial Strategies. We can help you examine your options and determine if your investments are operating to their potential. Our goal is to helping you aim to avoid unnecessary tax penalties down the road.
If you’re thinking about ways to handle capital gains, reach out to us by calling 559-440-6999 or emailing firstname.lastname@example.org to get started.
Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.