How To Reduce Your Capital Gains Tax

How To Reduce Your Capital Gains Tax
  • Opening Intro -

    A lot of people tend to assume that capital gains tax only affect the wealthiest people among us.

    However, that's certainly not the case and it affects anyone who's selling their property.


This kind of property can be the likes of real estate, stock or anything else that can generate a significant amount of profit for the seller. Having said that, though, there are a lot of things that people don’t realize about real estate capital gains tax.

Chief among these is that people can utilize a variety of strategies to reduce the tax that they owe once they sell a property. Keep in mind that almost all of these strategies have to be started before you actually sell the property, so you’ll need to prepare and plan ahead.

Sell On A Low-Income Year

In the vast majority of cases, your capital gains tax is affected by your marginal tax rate which, in turn, is affected by your income. If your yearly income tends to fluctuate from year to year, then you might want to consider waiting until a leaner year before selling any property.

This lower income will put you in a lower tax bracket so you’ll end up paying fewer taxes overall. It’s also worth considering waiting until you retire until you sell off any property if you’re already nearing retirement age.

Many people believe that they should sell off their properties before retiring so they’ve got money in the bank to enjoy their retirement with. However, it could end up being a whole lot more profitable in the long run if you sell the property once you’ve retired.

This is for the same reason as above, just taken a little further. Naturally, you might not have much taxable income when you’re retired, so you’ll save thousands on your taxes when you do eventually sell.

Keep Records Of Home Improvements

Improving or repairing a property adds to what’s called your basis in the property, which can have a major impact on how much capital gains tax that you’ll have to pay once it’s sold. The higher your basis is, then the fewer capital gains tax you’ll end up paying.

The IRS has said that a home improvement includes anything that betters your house; for example, adding an extension or swimming pool counts as a home improvement. It also includes the likes of repairs or upgrades that you might make on the premises; new doors and windows would be an obvious example of this. Because of that, it’s important to ensure you keep records of each of these improvements as you’ll need to prove the work was done before you can make a claim.


Keep The House For Longer Than A Year

This is something that will mainly affect the likes of house flippers, but it’s something that’s extremely helpful when it comes to reducing your overall capital gains tax. This is because in most jurisdictions, a house, or any property, is considered a long term asset after you’ve owned it for a year. As such, it’s taxed at a lower rate than if you had only owned it for six months. If you’ve held the property for at least a year, then your capital gains tax will end up being less than your marginal tax rate.

For example, if you’re taxed at a marginal rate of  10% or 15%, then you’ll pay a capital gains rate of 0%. Between 25% and 35%, marginal taxpayers will have to pay 15% capital gains tax. Those at a 39.6% marginal rate will only have to pay 20% capital gains tax. Should you sell the property before holding it for at least a year, then you’ll end up with a tax bill a lot higher than you anticipated. Coupled with waiting until a year where your income is lower than normal, you could end up cutting thousands out of your overall tax bill.

other valuable tips:

By using one or more of these strategies, you should be able to drastically reduce the amount of capital gains tax that you’ll need to pay on any real estate. These don’t just affect the wealthiest people either, as anyone who’s set to pay capital gains tax will be able to benefit from any of the strategies.

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