You made a sound investment in real estate or collectibles and now you’re ready to sell and reap the benefits. Unfortunately, you notice that the return is nowhere near as big as you thought it would be. This is more than likely because of the capital gains tax. Our team here at the Tax Crisis Institute is here to help you better understand the capital gains tax and how you can lower it or avoid it altogether.
What Are Capital Gain Taxes?
A capital gains tax is levied on the positive difference between the sale price of the asset and its original purchase price. This tax is triggered when an asset is sold. Stock shares that appreciate every year will not be taxed for capital gains until they are sold, regardless of how long you have them for.
There are two different types of capital gains taxes – long-term capital gains tax and short-term capital gains tax. Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year. The rates are 0%, 15%, or 20% depending on your tax bracket. The higher your tax bracket, the higher the rate.
Short-term Capital Gains
A short-term gain is a profit from a sale of personal or investment property that has been held for a year or less. This profit is taxed as ordinary income, which is your income tax rate. While long-term capital gains are taxed at a capital gains rate, short-term gains are taxed at the taxpayer’s top marginal tax rate.
If you have an investment that’s in an individual retirement account (IRA), you do not have to pay short-term capital gains taxes on that income. However, if you take out any money from the IRA, the withdrawal amount is considered income and is taxed at your ordinary tax rate. This allows you to grow your investments without paying capital gains taxes.
Are there Special Capital Gains Rates and Exceptions?
There are several different assets that get special treatment. Some of those assets include:
Many people treat art, antiques, jewelry, metals, stamps, sports memorabilia, and pop-culture memorabilia as investments. Gains on these investments are taxed at a 28% rate, regardless of your income. If you’re in a lower bracket than 28% you will be levied at this higher rate. However, if you’re in a bracket with a higher rate your capital gains tax will be limited to 28%.
Owner-Occupied Real Estate
A principal residence is where an individual, couple, or family household lives most of the time. This can be a house, an apartment, a trailer, or a boat. When you sell your home, $250,000 of your capital gains from the sale are excluded from taxable income (this number is $500,000 for those married filing jointly). This applies as long as you have been living in your home for two years or more.
For example, if you bought your house for $300,000 and sold it for $600,000, you made a $300,000 profit on your house. After applying for the $250,000 exemption, you must now report a capital gain of $50,000, which is subject to a capital gains tax. Significant repairs and improvements can be added to the base cost o the house, reducing the among of taxable capital gain.
Investment Real Estate
Those who own real estate are often afforded the opportunity to take deprecation deductions against income to reflect steady deterioration as property ages. This reduces the amount you’re considered to have paid for the property. This increases your taxable capital gain if you sell the property.
How to Reduce Capital Gains Tax
The capital gains tax can greatly reduce the overall return generated by an investment. However, there are some legitimates ways you can reduce or even eliminate the net capital gains taxes for the year. Here are some strategies to help you reduce your capital gains tax:
Use Excess in Capital Losses in Other Ways
Capital losses can offset capital gains and effectively lower capital gains tax for the next year. However, if the losses are greater than the gains you can claim that amount against your income. For example, if you secure a gain of $5,000 form one investment while losing $20,000 from other investments, the loss can be used to cancel out tax liability for the $5,000 gain. Just be careful selling investments at a loss to realize a tax advantage. If you do this within 30 days or less you could get in trouble with the IRS because of the wash-sale rule.
Time Gains Around Retirement
If you are approaching retirement, consider waiting until you stop working to sell your assets. Your capital tax bill may be reduced if your retirement income is low enough. You might be able to avoid having to pay capital gains taxes at all.
Watch Your Holding Periods
It’s important to keep in mind that any asset sold after a year will receive the long-term capital gains tax. If you are selling something that was bought about a year ago, make sure to find out the actual trade date of the purchase. You may be able to avoid short-term capital gains if you wait several days before selling.
Tax Crisis Institute is Here to Help
If you’re in need of assistance with your short-term or long-term capital gains taxes, our team here at the Tax Crisis Institute is here to help. We offer a wide range of tax solutions to help our clients get better control of their tax situation. We also help those who are behind on their taxes. Get ahold of us to find out how we can help you with your tax needs.