How to avoid capital gains tax on investment properties
They say that the only things in life that are certain are death and taxes. While this may be true for most of the myriad taxes of everyday life, such as income, sales and property tax, the same is not necessarily true of capital gains tax.
As you probably know, a capital gains tax is incurred when a profit is made on the sale of personal or investment property. This means that if you’re selling an investment home, you could be required to pay huge amounts to the state based on how much you profit.
Fortunately, reducing or even avoiding capital gains tax altogether is possible, and completely legal. Here how to avoid the capital gains tax and keep more of your money in your pocket, where it belongs.
Offset with Losses
Capital gains tax is not a fixed penalty or fee. How much you pay depends entirely on your circumstances. If you have incurred a number of “losses” financially in the year, then submitting these will lower the tax. If you want to know how to reduce capital gains tax in the simplest way, this is probably it.
Do what savvy investors do and time your capital losses with capital gains. While your yearly limit for losses to use is $3000, anything over this can be carried forward into future tax years, which you can use to reduce your taxes.
Avoiding Capital Gains Tax by Reinvestment
If you want to avoid capital gains tax almost entirely, you can do so by choosing to reinvest capital gains to avoid taxes. Millions of investors have taken advantage of the 1031 exchange.
This allows you to avoid the tax if you immediately reinvest the proceeds of the sale into a similar “like-for-like” investment. This process can be repeated indefinitely.
Offset with Expenses
Like all other taxes, you can reduce or defer capital gains tax by offsetting with expenses. If your investment is a house, then home renovations and all costs related to selling the property (realtor fees, etc.) may be used to reduce the tax you owe.
Similarly, if you are putting money into a Health Savings Account (HSA), your contributions can be used to avoid taxation. As long as the money from your capital gains is invested into an HSA and withdrawn for health expenses, you won’t need to pay tax.
Gift It To Family Members
A time-honored method for those trying to figure out how to avoid capital gains tax is to simply gift your assets to family members. If those family members are in a lower tax bracket than you, then the tax liability from capital gains will also be lower.
Moving assets to close family members and registering it as a gift can save you hundreds of thousands of dollars. Just make sure the family member is someone you know well and trust.
To learn more about avoiding capital gains tax, or simply how to make the most out of your property investments, make sure to follow our real estate section for all the help you could ever need.