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 do I avoid capital gains tax on the sale of my home? ›

As long as you lived in the property as your primary residence for 24 months within the five years before the home's sale, you can qualify for the capital gains tax exemption.

What is a simple trick for avoiding capital gains tax? ›

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.

How do I avoid capital gains tax when selling stock? ›

How to Minimize or Avoid Capital Gains Tax
  1. Invest for the Long Term. You will pay the lowest capital gains tax rate if you find great companies and hold their stock long-term. ...
  2. Take Advantage of Tax-Deferred Retirement Plans. ...
  3. Use Capital Losses to Offset Gains. ...
  4. Watch Your Holding Periods. ...
  5. Pick Your Cost Basis.

How can I reduce capital gains tax? ›

13 ways to pay less CGT
  1. 1) Use your CGT allowance. ...
  2. 2) Give money or assets to your spouse or civil partner. ...
  3. 3) Don't forget your losses. ...
  4. 4) Deduct your costs. ...
  5. 5) Increase your pension contributions. ...
  6. 6) Use your ISA allowance – each year. ...
  7. 7) Try Bed and ISA. ...
  8. 8) Donate to charity.

At what age do you not pay capital gains? ›

Since the tax break for over 55s selling property was dropped in 1997, there is no capital gains tax exemption for seniors. This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.

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.

Do you pay capital gains after age 65? ›

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 much capital gains is tax free? ›

Long-term capital gains tax rates for the 2023 tax year
SingleUp to $44,625$44,626 – $492,300
Married filing jointlyUp to $89,250$89,251 – $553,850
Married filing separatelyUp to $44,625$44,626 – $276,900
Head of householdUp to $59,750$59,751 – $523,050
1 more row
Mar 13, 2024

Do I have to pay capital gains tax immediately? ›

This tax is applied to the profit, or capital gain, made from selling assets like stocks, bonds, property and precious metals. It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset.

How long does a stock need to be held to avoid capital gains tax? ›

Any profit you make from selling a stock is taxable at either 0%, 15% or 20% if you held the shares for more than a year. If you held the shares for a year or less, you'll be taxed at your ordinary tax rate.

How much capital gains tax will I pay if I sell stock? ›

According to the IRS, the tax rate on most long-term capital gains is no higher than 15% for most people. And for some, it's 0%. For the highest earners in the 37% income tax bracket, waiting to sell until they've held investments at least one year could cut their capital gains tax rate to 20%.

What is the 36 month rule? ›

The 36-month rule is a UK tax law that affects how much capital gains tax (CGT) you owe when you sell a property within a certain time. Basically, if you sell a property within 36 months of buying it, you might have to pay CGT.

Do I pay capital gains if I reinvest the proceeds from sale? ›

While you'll still be obligated to pay capital gains after reinvesting proceeds from a sale, you can defer them. Reinvesting in a similar real estate investment property defers your earnings as well as your tax liabilities.

How is capital gains calculated on sale of property? ›

If you owned the home for more than one year before you sell, then the difference between your amount realized on the sale and your tax basis in the home is subject to a capital gains tax rate of 0%, 15%, or 20%, depending on your income, plus a 3.8% surtax for upper-income individuals.

Can closing costs be deducted from capital gains? ›

In addition to the home's original purchase price, you can deduct some closing costs, sales costs and the property's tax basis from your taxable capital gains. Closing costs can include mortgage-related expenses. For example, if you had prepaid interest when you bought the house) and tax-related expenses.

What is the 6 year rule for capital gains tax? ›

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.

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

In order to take advantage of this tax loophole, you'll need to reinvest the proceeds from your home's sale into the purchase of another “qualifying” property. This reinvestment must be made quickly: If you wait longer than 45 days before purchasing a new property, you won't qualify for the tax break.


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