How to avoid capital gains tax (2024)

Most people are familiar with two ways we pay taxes: income taxes and sales taxes. Income taxes are automatically withheld from pay or paid by independent contractors, self-employed individuals and some others based on how much money is earned. Sales taxes, meanwhile, are typically paid at the point of purchase when we buy retail goods and some services.

But there’s another kind of tax that’s often not as well-understood: capital gains taxes.

Which assets qualify for capital gains tax?

Capital gains taxes are owed when an asset, such as investment securities, real estate or an investment property, is sold for more money than was paid for the asset.

Tax efficiency is an important aspect of managing your investments and growing your net worth.

How capital gains are computed

A capital gain is computed by subtracting the purchase price of an asset from the selling price. So if you bought a stock for $1,000 and sold it for $2,000, you would realize a capital gain of $1,000. You will owe tax on this $1,000 capital gain during the tax year when you sold the asset.

Put simply: Capital Gain = Selling Price – Purchase Price

Note that tax is only owed on capital gains when they are realized or sold. If you hold onto this stock instead of selling it, you have what’s termed an unrealized capital gain. No tax would be due on the gain until you sold the asset.

The rate of tax that’s due on capital gains depends on how long you have held the asset. If you hold a stock for one year or longer, your gain will be taxed at the long-term capital gains tax rate. But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate.

Capital gains rates for 2022

Federal long-term capital gains tax rates are based on adjusted gross income (AGI). The basic capital gains rates are 0%, 15%, and 20%, depending on your taxable income.1 The income thresholds for the capital gains tax rates are adjusted each year for inflation.

Capital gains tax rate

Taxable income (single)

Taxable income (married filing separate)

Taxable income (head of household)

Taxable income (married filing jointly)


Up to $41,675

Up to $41,675

Up to $55,800

Up to $83,350


$41,676 – $459,750

$41,676 – $258,600

$55,801 – $488,500

$83,351 – $517,200


Over $459,750

Over $258,600

Over $488,500

Over $517,200

Source:, “Topic No. 409 Capital Gains and Losses”

Capital gains on a primary dwelling are taxed differently from other real estate, due to a special exclusion. The first $250,000 of your gain on the home sale is excluded from your income for that year, as long as you owned and lived in the home for two years or more out of the last five years. For married couples filing jointly, the exclusion is $500,000.2

In addition to federal capital gains taxes, you may also be subject to state capital gains taxes.

Minimizing capital gains taxes

There are several strategies you can implement that can help you minimize capital gains taxes. Here are four of the key strategies.

1. Hold onto taxable assets for the long term.

The easiest way to lower capital gains taxes is to simply hold taxable assets for one year or longer to benefit from the long-term capital gains tax rate. While marginal tax brackets and capital gains tax rates change over time, the maximum tax rate on ordinary income is usually higher than the maximum tax rate on capital gains. Therefore, it usually makes sense from a tax standpoint to try to hold onto taxable assets for at least one year, if possible.

2. Make investments within tax-deferred retirement plans.

When you buy and sell investment securities inside of tax-deferred retirement plans like IRAs and 401(k) plans, no capital gains tax liability is triggered. Gains aren’t taxed until you begin withdrawing funds in retirement, at which time you may be in a lower tax bracket than you are now.

Since retirement account funds are able to grow on a tax-deferred basis, the account balances may grow more than they would if capital gains taxes were assessed. Roth IRAs and 401(k) plans take this one step further: Tax on gains aren’t assessed even when funds are withdrawn in retirement as long as certain rules are followed.

3. Utilize tax-loss harvesting.

This strategy involves selling underperforming investments and booking a loss. You can use these capital losses to offset taxable investment gains and up to $3,000 each year of ordinary income. Unused investment losses each year can be carried forward indefinitely to offset capital gains and ordinary income in future years.

For example, suppose you realized a taxable profit of $5,000 on a stock sale this year. However, you own a stock that has fallen in value by $2,000 and you don’t expect it to recover anytime soon. You could sell this stock, book the $2,000 loss, and reduce the taxable gain on the other stock to just $3,000.

It’s important to note that you can buy back the stock you sold at a loss if you wait at least 30 days to do so. If you buy it back sooner than this, the so-called “wash-sale rule” will prohibit you from using the loss to offset the capital gain.

4. Donate appreciated investments to charity.

Investments that have appreciated in value from when you purchased them can be donated to charity. You will receive a charitable donation tax deduction for the fair market value of the investment on the date of the charitable donation and will not pay capital gains tax on the investments donated to the charity.

Capital gains on real estate

As mentioned above, federal tax law provides a capital gains tax exclusion of up to $250,000 (or $500,000 for married couples filing jointly) on profits from the sale of a home.3

Keep in mind a few rules for this special exclusion:

  • It only applies to a home if it is your primary residence. It doesn’t apply to rental properties.
  • You must have lived in the home for at least two of the past five years. However, you don’t need to have lived in the home for two consecutive years.
  • You can only take advantage of this exclusion once every two years.

To accurately calculate how much you’ll owe, determine your cost basis. Add the sale price plus the cost of home additions and improvements with a useful life of more than one year, along with expenses associated with the purchase and sale of the home. The former includes closing costs, title insurance, and settlement fees, while the latter include real estate commissions and attorney’s fees. Then, subtract your full cost basis in the home from the sale price to arrive at your taxable profit.

Deducting these costs from the sale price of the home will lower your capital gain on the home sale, which could make a difference if you’re right on the edge of the $250,000/$500,000 exemption threshold.

Rental real estate

Internal Revenue Code section 1031 provides a way to defer the capital gains tax on the profit you make on the sale of a rental property by rolling the proceeds of the sale into a new property. Specific rules must be followed to properly complete the 1031 exchange; you can utilize a qualified 1031 exchange intermediary escrow company for this type of transaction.

The capital gains tax bill will be paid once the new property is sold. Savvy real estate investors may decide to defer the capital gains on rental property indefinitely by continuing to use 1031 exchange transactions for all their rental property sales.

Dig deeper

How do I avoid capital gains taxes on stocks?

There are a few ways to lower the capital gains tax bill you pay on profits from the sale of stock. You can claim your fees as a tax deduction, use tax-loss harvesting, or invest in tax-advantaged retirement accounts.

Capital gains tax brackets — what are the IRS tax brackets for capital gains?

Short-term capital gains are added to annual income and taxed at ordinary rates, ranging from 10% to 37%. Long-term capital gains are not included in your income — they are taxed separately.4 However, your taxable income does determine whether your long-term capital gains are taxed at 0%, 15%, or 20%.

What are short-term capital gains vs. long-term capital gains?

Short-term capital gains and long-term capital gains refer to how long you owned an asset, and further, how much you’ll be taxed. In the context of capital gains, short term means 12 months or less and long term means more than 12 months.

How to avoid capital gains tax (2024)


How can I avoid paying capital gains tax? ›

A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.

What is the 6 year rule for capital gains? ›

The capital gains tax property six-year rule allows you to treat your investment property as your main residence for tax purposes for up to six years while you are renting it out. This means you can rent it out for six years and still qualify for the main residence capital gains tax exemption when you sell it.

Can I reinvest capital gains to avoid taxes? ›

Reinvest in new property

The like-kind (aka "1031") exchange is a popular way to bypass capital gains taxes on investment property sales. With this transaction, you sell an investment property and buy another one of similar value. By doing so, you can defer owing capital gains taxes on the first property.

Do I have to buy another house to avoid capital gains? ›

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

At what age do you not pay capital gains? ›

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

How to get 0 capital gains tax? ›

A capital gains rate of 0% applies if your taxable income is less than or equal to:
  1. $44,625 for single and married filing separately;
  2. $89,250 for married filing jointly and qualifying surviving spouse; and.
  3. $59,750 for head of household.
Jan 30, 2024

How many years to stay in a house to avoid capital gains tax? ›

The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.

How to avoid paying capital gains tax on inherited property? ›

Here are five ways to avoid paying capital gains tax on inherited property.
  1. Sell the inherited property quickly. ...
  2. Make the inherited property your primary residence. ...
  3. Rent the inherited property. ...
  4. Disclaim the inherited property. ...
  5. Deduct selling expenses from capital gains.

Do I have to pay capital gains tax immediately? ›

It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset. Working with a financial advisor can help optimize your investment portfolio to minimize capital gains tax.

Do senior citizens have to pay capital gains tax? ›

Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”

How to offset capital gains tax? ›

Minimizing capital gains taxes
  1. Hold onto taxable assets for the long term. ...
  2. Make investments within tax-deferred retirement plans. ...
  3. Utilize tax-loss harvesting. ...
  4. Donate appreciated investments to charity.

How much capital gains are tax free? ›

Long-term capital gains tax rates for the 2023 tax year
SingleUp to $44,625Over $492,300
Married filing jointlyUp to $89,250Over $553,850
Married filing separatelyUp to $44,625Over $276,900
Head of householdUp to $59,750Over $523,050
1 more row
Mar 13, 2024

What is a simple trick for avoiding capital gains tax on real estate investments? ›

Use a 1031 Exchange

A 1031 exchange, a like-kind exchange, is an IRS program that allows you to defer capital gains tax on real estate. This type of exchange involves trading one property for another and postponing the payment of any taxes until the new property is sold.

How long do you have to reinvest your money after selling a house? ›

Frequently Asked Questions about Capital Gains Tax

As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes. You might have to place your funds in an escrow account to qualify.

How to avoid paying taxes after selling a house? ›

If you owned and lived in the home for a total of two of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D.

What makes you exempt from capital gains? ›

When does capital gains tax not apply? If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive.

What income level avoids capital gains tax? ›

For the 2024 tax year, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or less. The rate jumps to 15 percent on capital gains, if their income is $47,026 to $518,900. Above that income level the rate climbs to 20 percent.

What can you offset against capital gains tax? ›

You can deduct the stamp duty costs and the solicotr fee. The mortgage fee is not in relation to the actual sale of the property and is therefore not allowable. You cannot deduct any outstanding mortgage either.

What lowers capital gains tax? ›

Long-term investing offers a significant advantage in minimizing capital gains taxes due to the favorable tax treatment for investments for longer durations. When investors hold assets for more than a year before selling, they qualify for long-term capital gains tax rates, typically lower than short-term rates.

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