4 Ways to Reduce or Avoid Capital Gains Tax

Out last Friday Focus was all about real estate…. reverse mortgages, buying, selling, relocating, rentals, and more…

4 Ways to Reduce or Avoid Capital Gains Tax: Now let’s dive into the tax consequences of selling.

How Capital Gains Tax Works

Let’s say, I bought something for $100,000 and later I sell it for $200,000. The gain in that case is 100,000.

Uncle Sam then wants his share of your profits.

How much his share is, aka the capital gains rate, is based on your income tax bracket.

It could be as low as 0%, the average is 10% but it can go up to 15%.

Capital gains are not only from property, but also from investments such as stocks, or mutual funds.

I bought XYZ company stock 10 years ago for $100 a share and now it’s $300 a share, I have a capital gains if I sell it.

Reducing Capital Gains Tax

1031 Exchange (for Property)

One of the things you can do if you sell something is to reinvest in another piece of property. This is called a 1031 exchange. You’re just exchanging one piece of property for another piece of property. Therefore, you don’t have to pay the capital gains on it at that point. The gain doesn’t go away, but you don’t have to pay the taxes at that point.

Note: if you have an annuity or life insurance policy with a gain, you can do what is called a 1035 exchange and exchange one annuity for another, one life policy for another.

Step Up in Cost Basis (for Real Estate and Investments)

Inheritance results in a step-up in the cost basis. Beneficiaries who inherit assets do not have to pay capital gains tax; instead, the cost basis becomes the value on the day they inherit it.

For instance, if you purchased something for $100,000, and it has appreciated to $200,000 by the time you pass away, your beneficiaries will inherit it with a cost basis of $200,000. If they decide to sell it, they won’t owe any capital gains taxes. However, if they choose to keep it and its value subsequently increases from $200,000 to $300,000 before they sell it, they will be liable for capital gains tax on the gain from $200,000 to $300,000.

Opportunity Zone Funds (for Real Estate and Investments)

In the last few years, an opportunity came to be, it even has opportunity in its name, Opportunity Zone Funds.

4 Ways to Reduce or Avoid Capital Gains Tax ,This is a fund that invests in real estate in opportunity zones or places where the government has decided they want to develop.

Now the cool thing with an opportunity zone fund is you can separate your gains from your basis.

In this case, if you bought something for $100,000 and are selling it for $200,ooo then the $100,000 of capital gains (or any part of that) can be put into an Opportunity Zone fund and delay, reduce and possibly avoid capital gains taxes.

Where, if you’re doing a 1031 exchange, that whole $200,000 has to go into the new property, with the opportunity’s own fund, I can take just the gains.

Now, there are multiple ways to take the funds out of the Opportunity Zone fund and pay reduced or no capital gains taxes. Watch our video on the details of Opportunity Zones here.

Reducing Capital Gains Taxes in Investments

Tax efficient investing aims to reduce capital gains and other taxes in non-qualified (aka not IRA or ROTH) accounts. Taxes may not look like they affect gains on the surface level, meaning it is not reflected in your monthly statement, but not taking taxes into account will affect your real returns. Learn more about tax-efficient investing here.

What is best for you? Let’s start with a conversation and find out!

Schedule Call With Michelle HERE.


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