Learn more about capital gains and how they are taxed so that you can efficiently build wealth…

Caution: 35-minute read

Even with all that is happening with tariffs and uncertainty on the world stage, there are some bright spots in spite of it being the tax season in the United States.

Although there is much that is simple and uneventful in the tax code, there also are more complex topics that could be more challenging for you when it comes to using the tax code to your benefit and you want to be aware of them proactively as opposed to re-actively.

Whether it is the sale of your home and the exclusion of gain, ($500,000 married and $250.000 single if you qualify), using Depreciation/Mileage, using Retirement Deductions/Savers Credit, Schedule A Deductions along with numerous other deductions that may appear complex but could be of real benefit to you at this time or at a time in your future, if you qualify or potentially qualify–you need to know about them.

Therefore, you want to be aware of them “prior to” filing your tax return–not after so that you can reach your immediate, short-term, intermediate and long-term goals in a more satisfying manner!

Just so we are all on the same page TheWealthIncreaser.com will define a few terms so that you can comprehend this discussion with more clarity:

Interest—a charge for borrowed money generally a percentage of the amount borrowed.

Deferral of gain–In a tax-deferred exchange, the deferred gain is the amount of gain that escapes current taxation and is deferred until a later date.  Deferral of gain is a strategy that is often used in 1031 exchanges involving like-kind property by savvy investors who desire not to pay taxes at the time, and desire to prolong the payment of capital gain taxes to a date in the future and in some cases after they transition.

Dividends—a dividend is a distribution of a company’s earnings to eligible shareholders (not all companies pay dividends).

ESOP–stock options offered to employees at some companies

Ordinary dividend—ordinary income is income earned by an entity or an individual that is taxable at marginal tax rates, therefore an ordinary dividend that you received would be taxed at your marginal tax rate.

Qualified dividend—a qualified dividend is an ordinary dividend reported to the Internal Revenue Service (IRS), which taxes it at capital gains tax rates which are generally more favorable to most taxpayers.

Realized gain—a real profit that shows up not only on paper, but also in your bank or investment account.  A realized gain is an increase in value of an asset or investment you own and have sold or cashed-in on.  A tax occurs only when sold and if held for over a year the gain would be taxed at the capital gains rate based on your income.  Exceptions may apply in certain situations based on the asset classification, timing of the gain, and your income level as the AMT or NIIT could apply, thus increasing the taxation on the gain.

Unrealized gain—a potential profit that shows up on paper or an increase in value of an asset or investment you may own but have not sold or cashed-in on.  A tax occurs only when sold.  Realized and unrealized losses also follow the same logic, as there is either a paper loss or an actual loss, depending on the actions you take or fail to take–and at what time you take those actions (short versus long-term).

Capital asset–capital assets among others include stocks, bonds, mutual funds, 529 plans, real estate, sale of business, crypto, timber sales from your land, collectibles, etcetera.  Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, mutual funds, ETFs and even collectibles or art.

Although there are exceptions, capital gains can be short (taxed as ordinary income) or long term (taxed at the generally more favorable capital gains rate of 0, 15, or 20%) and deferred as in the case of a “successful” 1031 exchange or installment sale! 

In many instances you will have to pay capital gains taxes if you sell a capital asset for a gain and in some cases a capital loss can be used to offset capital gains to a limit.  In this discussion TheWealthIncreaser.com will focus on the topic of capital gains so that you can use the concept to achieve more during your lifetime.

Common “exceptions” to standard capital gain rates:

Collectibles (taxed at the higher 28% rate)

Owner Occupied Real Estate (all or a portion may be excluded from taxation depending on the amount of gain))

Rental Real Estate (depreciation add back may increase your capital gains tax)

1031 exchange (a successful exchange can defer your taxes to a later date once property is sold)

Installment Sale (instead of being taxed in one year, your gain would be taxed over a number of years and that could have the effect of lowering your overall capital gains tax)

Art/Collectables capital gain rate is 28%

Antique Cars capital gain rate is 28% 

All of the following are taxed at the higher capital gain rate of 28%:

• Works of art
• Rugs and antiques
• Metals and gems (gold, silver, platinum, palladium etcetera)
• Stamps and coins
• Alcoholic beverages (fine wines, rare whiskeys, vintage champagnes, craft beers, limited edition spirits etcetera)

Note: Additionally, the IRS reserves the right to classify any other tangible personal property as a collectible for tax purposes.  And there are some limited exceptions for certain metals, gems, and coins.  Additionally, if you have some of the above assets inside of a fund in a non-physical form, you might be able to avoid the higher 28% rate.

Essentially, if you sell your collectible for a profit, you will face capital gains tax.  As you would expect, the amount you’ll owe depends on how long you’ve held onto the item (short versus long-term).

For short-term holdings of one year or less, any profit is taxed as ordinary income at your marginal federal tax rate.

Long-term gains, on the other hand, are treated differently:

• If you’ve held the collectible for over a year, you’ll be subject to a maximum tax rate of 28%.  This rate is higher than the typical long-term capital gains tax rates of 15% or 20%.

• Why is this rate higher?  The federal government basically wants to discourage speculation in potentially volatile markets and encourage investments that contribute more directly to economic growth.  Also, while the maximum 28% rate for long-term collectible gains exceeds rates for other assets, it’s still lower than short-term rates taxed as ordinary income for those in the higher income tax brackets.

• Determining your tax liability on a collectible sale involves a few steps.  First, you need to establish “your basis” in the item.

• For purchased collectibles, like silver bars, for example, your basis is generally the original cost plus any associated fees, such as costs for restoration (for hobbyists), expenses for specialized storage (climate-controlled facilities for art and other collectibles), or fees paid to brokers or dealers to obtain the asset.

• If you inherited the collectible, your basis would be its fair market value “at the time” of inheritance (adjusted basis).

Once you’ve determined your basis, subtract it from the sales price to find your capital gain.  This gain is then subject to the appropriate tax rate based on your holding period and income level.

Bonds–varies as municipal bonds may be tax exempt at the federal and possibly state level.

Cancellation of Debt–could in many cases be taxed at your ordinary income tax rate–you and the IRS would receive a 1099-C from the issuer who canceled your debt.

Collectibles–taxed at 28% rate

To report sales for collectibles, use Form 8949.  That information is then entered on Schedule D of Form 1040 to calculate and report your overall gains or losses.

Can the marginal rate on collectibles exceed 28%?

The effective tax rate on collectible gains can sometimes exceed 28% due to the net investment income tax (NIIT) and/or the alternative minimum tax or the more commonly known acronym AMT.

• Net investment income tax (NIIT): Depending on your adjusted gross income, you might face a 3.8% net investment income tax on your gains.  The NIIT is an additional tax on investment income for those with income exceeding specific thresholds (Modified Adjusted Gross Income of $200,000 for single filers and $250,000 for married couples filing jointly).

• For more information, see What is Net Investment Income Tax?

• Alternative Minimum Tax (AMT): If you are subject to the Alternative Minimum Tax (AMT), your effective tax rate could increase as well.  Also realize that your state and local taxes can also contribute to a higher overall tax burden when it comes to gains on collectibles and other capital assets.

Corporate Bonds

Interest earned from corporate bonds are fully taxable at all levels.  Because corporate bonds typically have the “greatest risk” of default, they pay the highest interest rates of any bond.  Investors who own 100 corporate bonds at $1,000 par value, with each paying 6% annually, can expect to receive $6,000 of taxable interest income each year, unless the account was held inside of a retirement account.

Corporate earnings–ordinary income rate of 21%

Short-term capital gains arise from the sale of assets held for a year or less and are taxed at the corporation’s ordinary income tax rate.

Corporate capital gains 

Long-term capital gains result from selling assets held for more than a year and are generally taxed at a lower rate.  This tax advantage encourages corporations to adopt strategic asset management practices, often opting to hold assets longer which normally strengthens the economy.  The type of asset sold also influences the capital gain classification.  For example, gains from selling depreciable business property, like machinery, may follow different tax rules than gains from investment securities.

Crypto Currency—considered an asset and capital gains would apply.  Cryptocurrency is treated as property for tax purposes in the United States, meaning that any profits from selling or using it are subject to capital gains tax.  You must report any taxable events, such as selling or trading crypto or other digital assets, on your tax return.  Additionally, if you own cryptocurrency and digital assets you must disclose if you have movement of those assets, along with disclosing if you have foreign holdings.

ESOP—stock option offered to employees at some companies that may be taxed at capital gain rates when exercised.  If done after retirement and depending on holding period could be taxed at ordinary income or capital gain rates.

Gaming/Gambling—if you file your taxes using schedule A you can deduct your gambling losses (keep good records) up to the extent of your gains thus reducing your gain that would be taxed at ordinary income rates up to 37%.  In many instances you would receive a form W-2G from the issuer (many winnings over $5,000 will have withholdings up to 24%) and the IRS would also receive a copy.

Gold Bullion/Precious Metals–when it comes to tax purposes, the IRS classifies precious metals held in physical form as collectibles, and thus they may potentially be taxed at the maximum collectable capital gains rate of 28 percent.

Government Bonds

The interest from Treasury bills, notes, and bonds are taxable at the federal level but not at the state and local levels.  In addition, some U.S. government agency securities, such as those issued by Fannie Mae, are taxable at the federal level but exempt from state and local taxes.

Municipal Bonds

Municipal bonds are generally tax-free at the federal level and may be tax-free at the local or state level if issued and purchased by you in the area that you reside.  Often purchased by high-income investors, municipal bonds can mean tax-free investment income when utilized in a strategic manner.

Zero-Coupon Bonds

Although they have no stated coupon rate, zero-coupon bond investors must report a prorated portion of “interest” each year as income.

A zero-coupon bond is an investment in debt that does not pay interest but instead trades at a deep discount.

The profit is realized at its maturity date when the bond is redeemed for its full-face value.  Always realize that zero-coupon bonds are issued by governments at discounts, and they mature at par values, where the amount of the spread is divided equally among the number of years to maturity.  Consequently, zero-coupon bonds are taxed as interest, just like any other original issue discount bond.

529 Plans have no capital gains or ordinary income taxes assessed on money in a 529 Plan and when the money is withdrawn, as long as it is used for a qualified purpose, there are no taxes due whatsoever.

Because of tax reforms that went into effect on January 1, 2018, plans now allow up to $10,000 per year per beneficiary to be used towards K-12 private school education.

In addition, the SECURE Act changed the 529 Plans’ list of qualified purposes to include certain apprenticeship programs, and to allow up to $10,000 to be used (only once, not annually) to reduce student loan debt for the named beneficiary.

The contribution limits for 529 Plans are the same as the federal annual gift tax exclusion, which is $18,000 per donor, per year, as of 2024.

ROTH IRA–contribution withdrawals are normally tax free, however earnings are taxable unless 5-year rule and age 59 1/2 rule is met prior to withdrawal otherwise taxable with penalty unless an exception applied.  Mandatory withdrawals are not required at age 73.

Traditional IRA & Retirement Plans–capital gain taxes are normally deferred, early withdrawals (before age 59 1/2) would be taxed as ordinary income and incur a 10% penalty unless an exception applied.  Mandatory withdrawals are normally required at age 73.

Other–my asset doesn’t appear on this post.

More research may be necessary by you or your financial professional(s) to determine if you must pay capital gains or any other taxes on the asset in question.  Additionally, the IRS reserves the right to classify any other tangible personal property as a collectible for tax purposes.

Due to the importance of real estate in the building of wealth in many households, the capital gains implications will be discussed in detail below so that you can build wealth more efficiently.

Capital Gains & Real Estate

Personal rental real estate 2 of 5 rule not met 0%, 15% and 20% capital gains rate apply on rental properties sold (depreciation that you claimed or failed to claim as a deduction over your years as a rental owner will be added back thus increasing your gain)

Personal real estate 2 of 5 rule met $250,000 exempt from taxation for single and $500,000 if married (technicalities apply) will be exempt if your gains don’t exceed these limits and you otherwise qualify

Rental Real Estate 0%, 15% and 20% on rental properties sold (depreciation recapture of 25% will apply to a portion of the sales gain)

Sale of Business form 4797, 0%, 15% 20% or other rate may apply depending on time that business or assets are sold along with the depreciation calculation

Refinance your home or rental property (considered a loan and no capital gains or any taxation, if proceeds are used for home improvement, interest repayment may be deductible on your tax return)

Many people know the basics of the capital gains tax and are aware that gains on the sale of personal or investment property held for more than one year are taxed at favorable capital gains rates of 0%, 15%, or 20%, plus a 3.8% net investment income tax for people with higher incomes, but many are unaware that:

• The capital gains rates are based on set income thresholds, which are adjusted annually for inflation.

• For 2024, the 0% rate applies to individuals with taxable income up to $47,025 for single filers, $63,000 for head-of-household filers, and $94,050 for joint filers.

• The 15% rate is for individuals with taxable incomes between the 0% and 20% break points of $47,026 to $518,900 for single and $94,050 to $583,750 for joint filers.

•  The 20% rate starts at $518,901 for single filers, $551,351 for head-of-household filers and $583,751 for joint filers.

Residential Real Estate

• Compared to long-term gains, the sale of personal or investment property held for one year or less, which are taxed as ordinary income rates up to 37%, the 0, 15%, and 20% rates appear quite appealing.  There are also “a lot of exceptions” to these general rules, with some major advantages applying to residential real estate that you must be aware of.

• With many residential home sales, the profit isn’t even taxed at all.  That’s because of the home sale exclusion that is available if you have owned and lived in your main home for at least two out of the five years before the sale date.  You could avoid capital gains tax on up to $250,000 ($500,000 for joint filers) of your gain from the sale.  Any gain above the $250,000 or $500,000 exclusion amounts is taxed at long-term capital gains rates.  If you had a loss from the sale of your primary home, “the loss is not” deductible.

Let’s say you’re married, bought your home in 2005, have a tax basis of $150,000, and are selling the home for $550,000.  The entire $400,000 gain is tax-free to you and your spouse (Call me now and let’s party–LOL).

Let’s now take the same example, but instead of selling your home for $550,000, you sell it for $900,000.  The first $500,000 of the gain is tax-free, and the remaining $250,000 is taxed at long-term capital gains rates.  (Call me now and let’s really party–LOL).

• To determine your gain or loss from the sale of your primary home, you start with the amount of gross proceeds reported in Box 2 of Form 1099-S and subtract selling expenses such as commissions to arrive at the amount realized.

• You then reduce that figure by your tax basis in the home to come up with your gain or loss.

• To figure the tax basis in your home, start with the original cost, including the mortgage if you financed the purchase, add certain settlement fees and closing costs, plus the cost of any additions as well as improvements that add to the value of your home, prolong its useful life, or adapt it to better uses.

• IRS Publication 523 has some examples of improvements that increase your tax basis in the home and those that don’t.  Examples of big-ticket items that are added to your basis include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Even small-scale capital improvements can increase basis.  These include new doors and windows, duct and furnace work, built-in appliances and water heaters.

• Repairs, maintenance and improvements that are necessary to keep your residence in good condition but don’t add value or prolong its life generally will not increase your basis.

• If you claim a tax credit or otherwise receive a subsidy for putting in energy-savings improvements in your home, you must first reduce the cost of the system by the tax credit or subsidy that you received before increasing your home’s tax basis.

More on the Home Sale Exclusion: Capital Gains Tax Home Sale Exclusion, What You Need to Know

If you must sell your home early, you may still be eligible for a portion of the exclusion, depending on the circumstances that led you to sell.  If your home sale was prompted due to job changes, illness, or unforeseen circumstances, you may qualify for a partial exclusion.

The percentage of the $500,000 or $250,000 gain exclusion that can be taken is equal to the portion of the two-year period that you used the home as a residence.

For example, say you as a single person bought a home for $600,000 in March 2023, lived in it for 15 months, and sold it in May of last year for $685,000 after moving out of state due to an illness.  The maximum gain exclusion in this instance is $156,250 ($250,000 x (15/24)).  So, the $85,000 gain is fully excluded and tax-free. You can also use days or months for this calculation.

Death of a spouse and selling primary home

A spouse who sells the family home within two years after the death of the other spouse gets the full $500,000 exclusion that is generally available only to couples, provided the two-out-of-five-year use and ownership tests were met before death.

• There is also a welcome added tax benefit if you owned the home jointly with your spouse.

• If you don’t live in a community property state, half of the home will get a step-up in tax basis upon the death of the first-to-die spouse.

• The rule is more generous if the house is held as community property.  The entire tax basis is stepped up to fair market value when the first spouse dies.

Here’s an example.

Let’s say you and your spouse bought a home for $150,000 many years ago in a non-community property state, and it is worth $980,000 on the date that your spouse dies.  As the survivor, your tax basis in the home jumps to $565,000 (your half of the original $150,000 or $75,000 basis plus half of your deceased spouse’s $980,000 or $490,000 date-of-death stepped-up basis value).

Twenty months later, you as the surviving spouse sell your home for $1,100,000.  Of the $535,000 gain from the home sale ($1,100,000 – $565,000), $500,000 is tax-free and $35,000 is taxed at long-term capital gains rates that would be determined by where you would fall based on your tax bracket.

Home office deduction and selling a primary home

You may be wondering whether the capital gain tax on the sale of your home would differ if you took the home office tax deduction in prior years for using a room or other space in your residence exclusively and regularly for business or rental (e.g., as a home office or the rental of a spare bedroom).

It depends, but generally, the tax consequences are the same whether or not the home office deduction was previously claimed.  Gain on the office or rental portion generally qualifies as part of the $250,000/$500,000 capital gains tax exclusion for a primary home sale, subject to two exceptions.

1. The first is for so-called unrecaptured Section 1250 gain, which applies “if you took depreciation deductions in the past” for the office or rental space.  If you used the simplified method to claim home office deductions on your return, you don’t have to worry about recapturing depreciation claimed in years prior to your home sale.

2. The second exception applies if the workspace or rental space is in a building on the          property separate from the main home—think first-floor storefront with an attached residence, rented apartment in a duplex, or working farm with a farmhouse or other unattached building on the property.

Rental property and capital gains calculation

If you hold rental property, the gain or loss when you sell is generally characterized as a capital gain or loss.  If the property was held for more than one year, it’s a long-term capital gain or loss, and if held for one year or less, it’s a short-term capital gain or loss.

The gain or loss is the difference between the amount realized on the sale and your tax basis in the property.

The capital gain will generally be taxed at 0%, 15%, or 20%, plus the 3.8% net investment income surtax for people with higher incomes.

However, a special rule that you must be aware of applies to gain on the sale of rental property for which you took “depreciation” deductions!

When depreciable real property held for more than one year is sold at a gain, the federal tax law requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%.   This is known in the tax industry as unrecaptured Section 1250 gain, and the name is based on the number in the federal tax code section.

Sale of vacation home and capital gains

Gains from the sale of vacation homes don’t qualify for the $250,000/$500,000 capital gains tax exclusion that applies to the sale of main homes.  You will pay tax on the entire amount of your profit and if you are contemplating the sale of your vacation home–you must prepare in advance for the tax consequences.

When you sell a vacation home, your gain will be subject to the normal capital gains tax on real estate!

Therefore, if you’ve owned the vacation home for more than one year before you sell, the difference between your amount realized on the sale and your tax basis in your home is subject to capital gains tax rate of 0%, 15%, or 20%, depending on your income, plus the 3.8% net investment income surtax if you are in the upper-income tax brackets.

If you owned the vacation home for a year or less, then any gain from the sale will be taxed at “ordinary income tax rates” up to 37%.

For example, say that in 2024, you sell a vacation home that you owned since 2010 for $875,000, and you have a tax basis of $635,000.  Your $240,000 gain is taxed at long-term capital gains rates.  And just as you can’t deduct a loss with your primary residence, so too is the case with your vacation property.

What if you convert a vacation home to your primary residence, live there for at least two years, and then sell your home?  Can you qualify for the full $250,000/$500,000 capital gains tax exclusion?

Probably not, but it depends!

• If you sell a main home that you previously used as a vacation home, some or all of the gain is ineligible for the home-sale exclusion.

• The portion of the gain that is taxed is based on the ratio of the period after 2008 that the home was used as a second residence or rented out to the total time that you as the seller owned the house.

• The remaining gain is eligible for the $250,000 or $500,000 home-sale exclusion.

Short sale of your main home and capital gains

After the great financial downfall in 2008, many financially distressed homeowners sold their home as a short sale in order to get from underwater mortgages on their home.  If you are considering a short sale of your home, you want to know the tax consequences upfront.

A short sale occurs when your mortgage lender agrees to accept less than the outstanding balance on your loan to help facilitate a quick sale of the property.

The tax rules applicable to short sales differ depending on whether the debt is recourse or non-recourse!

Recourse debt is when the owner/debtor remains personally liable for any shortfall.  If the lender forgives the remaining debt, a special tax rule provides that up to $750,000 in forgiven debt on a primary home is tax-free.

The owner/debtor will be taxed on any remaining forgiven debt at ordinary income tax rates up to 37%.

The tax results are different for non-recourse debt, meaning the owner/debtor isn’t personally liable for the deficiency and in this case, the waived debt is included in the amount realized for calculating capital gain or loss on the short sale.

For primary homes, no loss is allowed, and up to $250,000 of gain ($500,000 for joint filers) can be excluded from income for homeowners that meet the two-out-of-five-year use and ownership tests!

These same rules apply if your home is foreclosed on.

Main Home Destruction and capital gains

If your principal residence is damaged or destroyed in a hurricane, tornado, widespread wildfire, or other federally declared disaster, you’ll have gain to the extent the insurance proceeds you receive exceed your pre-disaster tax basis in the home.

Up to $250,000 ($500,000 for joint filers) of that gain is excluded from income if you meet the two-out-of-five-year use and ownership tests.  If your gain exceeded those amounts, your gain over those excluded amounts would then be taxed at capital gain rates.

One way to delay the tax hit on all or part of the otherwise taxable capital gains is to use the proceeds you get from your insurance company to buy a new home within four years of the disaster.  The so-called “involuntary conversion” rules are complex, so be sure to contact your tax adviser or other professional if you are thinking about this option.

Refinancing of your home or rental property and capital gains

As stated earlier and reiterated again, a refinance or tapping into your home equity are considered loans and no capital gains or any taxation on the proceeds will occur.  Furthermore, if funds are used for home improvement, interest repayment may be deductible on your tax return annually.

Always keep in mind that with a refi you must have an effective repayment plan in place and there will normally be closing costs that can get into the thousands.  You also want to ensure that your credit is at an acceptable level if you are seriously considering this option.

If you failed to plan properly or not at all, a reverse mortgage is yet another option that you have if you find yourself in position where you need more income during your retirement years and you have a high equity position with your personal residence.

Section 1031 exchanges and capital gains tax

When real property used in a business or held for investment is exchanged for like-kind real property under Section 1031 of the tax code, all or part of the gain that would otherwise be triggered if the real estate was sold can be deferred.  This tax break doesn’t apply to main homes or vacation homes, but it can apply to rental real estate that you own.

The Section 1031 exchange rules are very complicated and difficult to navigate, with many requirements that must be met in a timely manner.  Therefore, make sure to talk to your tax adviser and/or other professionals if you are seriously contemplating a like-kind swap of rental real estate that you own.

Opportunity Zone Funds and deferral of capital gains

The Qualified Opportunity Zone program was created under the 2017 tax reform law, the Tax Cuts and Jobs Act (TCJA).

• The program allows taxpayers to defer capital gains from the sale of business or personal property, including real estate, by investing the proceeds in entities called Qualified Opportunity Funds.

• These QOFs then use the money to help the development of struggling communities.

• As with many of the provisions in the TCJA, this program is set to expire after 2025.

Let’s say you have a large capital gain from the sale of a rental home that you owned, and you want to defer paying federal income tax on that gain.  If you can invest those gain proceeds in a QOF, you could see meaningful tax benefits come your way.

The gains are deferred until the earlier of December 31, 2026, or when you dispose of your QOF interest.

The tax would generally be owed at that time on the deferred gains less the tax basis in the QOF investment!

The longer you hold a QOF investment, the more tax incentives there are generally speaking. You, as an investor, would begin with a zero-tax basis.

Note: the deferred gain from your real estate sale will be taxed in 2026 unless updated legislation says otherwise.

You have 180 days from selling your real estate to invest the proceeds in a QOF.  You can invest all of your short-term or long-term capital gain proceeds from the sale or just part of the gains.  However, if you invest part of the gains, only that portion of the gains contributed to the QOF qualifies for deferral.

If you decide to go the QOF route, “you must elect” the tax deferral on your tax return for the year of the sale.  Be sure to follow the instructions on Form 8949 for electing deferral and reporting the deferred gain and be sure to submit Form 8949 with your return.

Also, you’ll have to complete and attach Form 8997 to your return.  Form 8997 lets the IRS know of the Qualified Opportunity Fund investment and the amount of gain deferred, among other information.

Conclusion

Whether art, antique vehicles, stocks, bonds, real estate, crypto or many other items that are sold for a gain–capital gains taxes may very well apply, and you want to know the likely amount that you will have to pay prior to the transaction (sale of assets) or before taxes will be due–not after.

When it comes to your personal finances, whether you require a tune-up or major overhaul, your awareness of capital gains at the earliest time possible will serve you well throughout your wealth building journey.

By having that awareness you will put yourself in position to know what to expect tax wise and you can plan for and take the amount that you will likely pay in taxes into the decision-making process and better determine if selling is your best option, or selling in a different manner, finding other ways to get the funds you need, doing a like-kind exchange when applicable or not selling at all–is your “best” option.

You can also reduce your capital gains after you transition by maximizing the gift tax guidelines while you are alive and participating in donor advised funds, (deduction can help reduce your overall taxes), charitable trusts and other estate planning options that can legally be done to reduce the size of your estate and increase what your heirs will receive and reduce what they will have to pay tax wise after your transition.

Charitable trusts, including donor advised funds and others can provide tax benefits by reducing your taxable income, avoiding capital gains taxes, and removing assets from your estate.  You normally need to have a sizable net worth and you will need a highly competent attorney who specializes in this area to educate and guide you in the process.

As a quick mental reference you can estimate roughly where you fall as far as “long-term capital gains taxes” are concerned!

First determined whether you file as Single, HOH or Married Filing Jointly and then commit the numbers below to memory and use those numbers as a “quick reference mental guide” to help you determine where you fall on the capital gains tax spectrum proactively–not reactively.

If you have income of roughly $50,000 or less and you are Single, you pay 0 capital gains tax, the 15% rate falls roughly between $50,000 and $520,000 and anything over roughly $520,000 in MAGI would be taxed at the 20% rate.

For Head Of Household filers, you can have income up to roughly $60,000 and pay 0 capital gains tax, the 15% rate falls roughly between $60,000 and $520,000 and the 20% rate applies for those who have MAGI above roughly $520,000.

For Married Filing Jointly filers you can roughly have MAGI income up to $100,000 and pay 0 capital gains tax, the 15% rate falls roughly between $100,000 and $600,000 and the 20% rate applies to couples who have MAGI above roughly $600,000.

By committing the above numbers to memory, you can use strategies to possibly pay zero in capital gains taxes and even when you have to pay, you will know or at a minimum have an idea of how the sale or cashing out of stocks, collectibles, mutual funds and other assets held outside of your retirement account will be affected based on capital gain rates based on your income and length of holding of the asset.

Also realize that short-term capital gains are taxed at ordinary income tax rates that apply, and further realize that income ranges used in the various tax brackets, along with MAGI amounts for long-term capital gains are adjusted annually, so the numbers will change.  However, the above rough estimates can be used as a guide to help you reduce or eliminate capital gain taxation and help you build wealth more efficiently at the various stages of your life.

In short, by analyzing your capital gains tax potential on the front end, you put yourself in a better position to make strategic decisions that can be of more benefit to you and your family in this economic climate–or any future economic climate–or even after you transition.  Also, if you are a high-income earner, be aware that an additional 3.8% NIIT and/or the AMT may apply to your capital gains tax payment on your tax return.

Isn’t it time you avoid short and long-term pain so that you can sincerely enjoy your capital gain!

You can now “fly high” as you pursue an unrelenting path toward capital gains and long-term wealth building success, as you have NOW been kicked out of your nest and you must now fly at an altitude that is your absolute best…

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