Capital Gains Tax Planning: Preparing for the Sale of Investments and Property
Selling investments or property can be a big financial move—one that comes with tax implications. Understanding how capital gains taxes work and planning for them could help you keep more of your profits and avoid tax surprises. Whether you’re selling stocks, real estate, or other assets, a thoughtful approach can make a difference. Here’s what you need to know about capital gains tax planning and strategies to help minimize your tax burden.
What Are Capital Gains Taxes?
When you sell an asset for more than you paid, the profit is considered a capital gain. The IRS classifies capital gains into two categories:
Short-term capital gains apply to assets held for one year or less. These are taxed at ordinary income tax rates, which can be as high as 37%.
Long-term capital gains apply to assets held for more than a year. These benefit from lower tax rates—0%, 15%, or 20%—depending on your income level.
Understanding whether your gain is short-term or long-term is important because it affects how much tax you owe.
Planning Strategies to Reduce Capital Gains Taxes
While taxes are inevitable, strategic planning can help reduce how much you owe. Consider these approaches before selling an asset.
Hold Investments for More Than a Year: Since long-term capital gains are taxed at lower rates than short-term gains, holding onto assets for at least a year and a day before selling could result in significant tax savings.
Utilize Tax-Loss Harvesting: If you have investments that have lost value, selling them can offset capital gains from profitable sales. This strategy, known as tax-loss harvesting, can help lower your overall tax liability. If your losses exceed your gains, you can deduct up to $3,000 from your ordinary income and carry forward any remaining losses to future years.
Take Advantage of the Primary Residence Exclusion: If you’re selling your home, you may qualify for the primary residence exclusion, which allows you to exclude up to $250,000 ($500,000 for married couples) of capital gains from taxes, provided you’ve lived in the home for at least two of the past five years.
Consider a 1031 Exchange for Real Estate: A 1031 exchange lets real estate investors defer paying capital gains taxes by reinvesting the proceeds from a sale into a similar property. This strategy is available for investment or business properties but not for personal residences.
Donate Appreciated Assets to Charity: Instead of selling appreciated investments and paying capital gains taxes, donating them directly to a charitable organization allows you to take a charitable deduction for the full market value while avoiding the capital gains tax.
Plan Sales Around Income Levels: Since capital gains tax rates vary by income, timing sales in lower-income years may reduce the tax impact. For example, if you plan to retire soon and expect your income to drop, waiting to sell assets may result in a lower tax rate. Consider talking with a financial advisor to see how timing works into your overall financial plan.
Use Tax-Advantaged Accounts: Investing in tax-advantaged accounts like IRAs and 401(k)s can help defer or eliminate capital gains taxes. For example, selling investments within a Roth IRA avoids capital gains taxes if you meet the withdrawal requirements.
State-Specific Considerations for California and Utah
While federal capital gains tax rates apply nationwide, state taxes also play a role. California has some of the highest state taxes on capital gains, as it treats them as regular income, with rates reaching as high as 14.4%. On the other hand, Utah has a flat income tax rate of 4.85%, meaning capital gains are taxed at the same rate as ordinary income.
If you’re selling property or investments in California, planning is especially important to avoid unnecessary tax burdens.
Working with a Fiduciary, Fee-Only Financial Advisor
Navigating capital gains taxes can be complex, especially when multiple assets or significant gains are involved. A fiduciary, fee-only financial advisor can help you develop a personalized tax strategy without being influenced by commissions or product sales. They can assist with tax-efficient investing, estate planning, and optimizing your asset sales to reduce your tax burden.
Final Thoughts
Proper planning can make a significant difference when selling investments or property. By understanding capital gains taxes, leveraging tax-saving strategies, and seeking professional guidance, you can keep more of your hard-earned money. Whether selling stocks, a rental property, or your home, taking a proactive approach can help you make informed financial decisions.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.