Capital gains tax is the tax on the profit made from selling a non-inventory asset, such as stocks, bonds, precious metals, real estate, and property.

Understanding the different strategies and sections of the Internal Revenue Code (IRC) can help you minimize your tax liability.

Short-Term vs. Long-Term Capital Gains:

Short-Term Capital Gains: Gains on assets held for one year or less, taxed at ordinary income tax rates.

Long-Term Capital Gains: Gains on assets held for more than one year, taxed at reduced rates (0%, 15%, or 20%).

Key Strategies to Minimize Capital Gains Tax

Utilizing Tax-Advantaged Accounts (IRC Sections 401(k), 403(b), and 457)

• Contributions to retirement accounts like 401(k), 403(b), and 457 plans can grow tax-deferred.
• Withdrawals during retirement are taxed at the ordinary income tax rate, potentially lower than your current rate.

Tax-Loss Harvesting (IRC Section 1211)

• Offset capital gains with capital losses to reduce taxable income.
• Carry forward excess losses to future years.

Using Primary Residence Exclusion (IRC Section 121)

• Exclude up to $250,000 ($500,000 for married couples) of capital gains on the sale of a primary residence.
• Must have lived in the home for at least two of the five years preceding the sale.

 Investing in Qualified Opportunity Zones (IRC Section 1400Z-2)

• Defer and potentially reduce capital gains tax by investing in Qualified Opportunity Funds.
• Hold the investment for at least 10 years to potentially eliminate gains on the new investment.

1031 Exchange (IRC Section 1031)

• Defer capital gains tax by exchanging real estate held for investment or business purposes.
• Must reinvest proceeds in a like-kind property.

Charitable Donations (IRC Section 170)

• Donate appreciated assets to charity to receive a charitable deduction and avoid capital gains tax.
• The deduction amount is based on the asset's fair market value.

Gifting Appreciated Assets (IRC Section 2503)

• Gift appreciated assets to family members in lower tax brackets.
• Annual exclusion allows gifting up to $18,000 per recipient without incurring gift tax.

Installment Sales (IRC Section 453)

• Spread the gain over several years by structuring the sale as an installment sale.
• Pay tax on each installment as it is received.

Utilizing Tax Brackets

• Plan asset sales during years with lower income to benefit from lower capital gains tax rates.
• Take advantage of the 0% long-term capital gains rate if income falls within specific thresholds.

Roth IRA Conversions (IRC Section 408A)

• Convert traditional IRA to Roth IRA to pay taxes now at a potentially lower rate.
• Future qualified withdrawals are tax-free, potentially avoiding higher future capital gains taxes.

Effective Capital Gains tax strategies can significantly reduce your tax burden, maximize your investment returns and retirement income.

BFS can offer you the best solutions prior to the conclusion of your transaction, so contact us before your transaction is final.

Always consult with a tax professional to tailor these strategies to your specific financial situation and ensure compliance with the Internal Revenue Code.