How to Reduce Capital Gains Tax

by Contributor ; Updated July 27, 2017
Reduce Capital Gains Tax

How to Reduce Capital Gains Tax. Selling the land, collector or stocks may seem like a windfall to the seller. What most do not realize is the government is standing on the other end of the transaction ready to collect their capital gains taxes. In most cases, it cannot be avoided. However, through planning and education it can be reduced.

Step 1

Hold the investment property or item for more than a year. Now is some cases this cannot be done because cash is needed quickly. But if an investor can retain the item for over a year or 366 days it becomes a long-term investment and is taxed at 15 percent or 5 percent. If the item is considered short-term, held a year or under, the seller will be taxed at their tax bracket percentage which can be as high as 35 percent.

Step 2

Maintain residence in the property for at least 2 years prior to the sale. Tax law states that if the property is your primary residence for at least 2 out of the 5 years prior to the sale, you are excluded from the capital gains tax. This exclusion for people filing single is capped at $250,000 and at $500,000 if you're married and filing jointly.

Step 3

Use an irrevocable domestic non-grantor trust to shield the capital gains. Contact an estate planner or tax attorney for more detailed information.

Step 4

Reduce the capital gains that is to be taxed from a given investment. For example, suppose you own a property and have made improvements on it. The cost of those improvements can be added to the price you initially paid for the investment. This will reduce your capital gains tax.

Step 5

Sell a stock at a loss to reduce capital gains tax. You can use this to offset the capital gains made on other investments. After 30 days, you can repurchase that same stock.