Top 7 Ways to Mitigate Capital Gains Taxes Upon Sale

Have you sold your home, a mutual fund, a stock, a business, or any other asset for a gain? If so, you probably paid Uncle Sam a hefty sum for the benefit of your successful sale. Built into the tax code are various methods to avoid current taxation on your gains. Today I will focus on seven ways to mitigate capital gains taxes upon the sale of almost anything.

1. Wait for Longer Than a Year Before You Sell: Waiting a year to sell an asset allows you to qualify for long-term capital gains, which have significantly better tax rates than short-term capital gains. ST Capital Gains add to your income and can be federally taxed up to 35%. Long-term capital gains only are taxed up to 20%.

2. Section 121 Exclusion: Sect 121 allows for you to exclude up to $500,000 in capital gains taxes ($250,000 if you’re single) when selling your primary residence. You have to have lived in your residence for 2 out of the last 5 years before selling and can use this technique every 2 years.

3. 1031 Exchange: Section 1031 of the IRC allows you to defer taxes when selling investment property as long as you reinvest within 6 months in a “like-kind” property. The term “like-kind” is extremely vague, giving you many options to reinvest (as long as the property isn’t for resale or personal use & the new property’s value is less than double the first property’s). You will eventually have to pay capital gains taxes when you sell the new property, but the exchange can be helpful for short-term goals. Of course, under the current tax code, there is no Capital Gains taxes upon your death (Although lots of Congressional proposals to get rid of the full step-up upon death).

4. Deferred Sales Trust: Section 453 of the IRC allows the buyer of your property to help defer your capital gains taxes by paying you over multiple future installments. This type of installment sale allows you to defer paying Capital Gains over multiple decades or even multiple lifetimes if set up correctly. It starts with you transferring your asset before selling it into a third party’s trust managed on your behalf.

5. Qualified Opportunity Zones (QOZ): The Opportunity Zone program offers extreme capital-gains tax breaks in exchange for investing in a qualified opportunity zone (pre-determined areas with low-income families). An Opportunity Fund (OF) invests 90% of its interests, property, or businesses into a QOZ in exchange for these tax breaks. Capital gains taxes in OFs can be deferred until 2027 or when sold, whichever is earlier. People that hold their OF investments for 5 years before 2027 can reduce their capital gains taxes by 10% or 15% if held for at least 7 years, and you will not have to pay capital gains taxes on any of your gains in the investment if held for more than 10 years.

6. Monetized installment saleThe Monetized Installment Sale (MIS) is another type of Installment sale which professes to allow you to sell an asset and have about 94% of the funds available to you for investment or business use immediately upon sale. You will pay the capital gains taxes on the amount you initially deferred in 30 years from the original sale. Hopefully, you can make those capital gains double, triple, or quadruple over the next 30 years when taxes are due.

7. Small Business Stock Gains Exclusion: Section 1202 of the IRC allows for small business stock capital gains to be excluded from federal taxes and exempt from the 3.8% net investment income (NII) tax. Here are the requirements: The stock needs to be acquired after September 27, 2010, needs to be held onto for more than five years, and on the date of issue to the company needs to be worth less than $50 million. The sections allow the greater of $10 million or 10x the stock’s adjusted basis of gains to be excluded from federal tax.

These tax mitigation strategies should only be utilized with the help of your CPA, Tax Professional, or Tax Attorney, and are derived from sources that are deemed reliable.

As always call me if you have any questions or would like to review your tax, retirement, or estate plan. 310-417-9040.

-Jeff Gurman

The information above is not to be construed as tax, legal, or investment advice. That advice can only be provided by independent tax, legal, or investment advisors. CA Insurance License #0815028

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