What happens when you hear the word “tax”? Do you mentally check out? Most people do, 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. 

And if even the term “capital gains tax” seems complicated, here’s a simple breakdown: you experience a capital gain when you sell something for more than you bought it for. That’s why it often comes up regarding selling a home. For example, if you purchase a house worth $200,000 and, thanks to an improved housing market, 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.

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 gain is 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 at 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. That’s why holding onto your property or investment so you make it past that one-year mark could save you thousands of dollars. 

You Have Some Choices

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.

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 married filing jointly) of the gains if they owned the property and lived in the house for at least 2 of the 5 years before 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. 

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 over capital gains and carrying any leftover capital losses forward into future years.

Do You Have More Capital Gains Questions?

You likely 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,  Louis Green can help you with your tax headaches, examining your options and determining if your investments are operating to their potential. His goal is to help you try to avoid unnecessary tax penalties down the road. If you’re thinking about ways to handle capital gains, reach out to Louis.