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 in regards to selling a home. For example, if you purchase a house worth $750,000 and, thanks to an improved housing market, it sells for $900,000, you’ve got a capital gain of $150,000 on your hands.
Thankfully, there are strategies you can implement to defer capital gains taxes, make the most of your sold asset, and hold on to more of your wealth. Here’s what you need to know.
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. (1)
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. (2) That’s why holding on to your property or investment so you make it past that one-year mark could save you thousands of dollars.
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 on to 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 on to 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.
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 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. (3)
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 typically face capital gains taxes.
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. (4)
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, our team at Wealth Advocate Group can help you with your tax headaches, examining your options and determining if your investments are operating to their potential. Our goal is to help you avoid unnecessary tax penalties down the road. If you’re thinking about ways to handle capital gains, call 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment.
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.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence and freedom from worry. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
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(1) https://www.investopedia.com/terms/c/capital_gains_tax.asp
(3) https://www.irs.gov/taxtopics/tc701
(4) https://www.fidelity.com/viewpoints/personal-finance/tax-loss-harvesting
