5 tax planning strategies you can use to avoid paying Capital Gains Tax
The stock market has recently been pretty volatile and many investors have sold off some of their investments to mitigate risk. For a lot of people, it’s a prudent move. However, the profits they’ve made will mean they’ll have to pay a hefty capital gains tax (CGT) of up to 39.6%.
When you invest in the stock market, you’ll have to sell your stock at one point or another. However, giving Uncle Sam 15% to 20% of your hard earned money doesn’t sound ideal, does it?
So, what can you do to avoid capital gains tax when you sell your stock?
5 ways to avoid paying Capital Gains Tax when you sell your stock
Here are 5 tax planning ideas to reduce or eliminate CGT for long-term capital gains, which are net profits on investments held over a year, plus their pros and cons:
1. Stay in a lower tax bracket
If you’re a retiree or in a lower tax bracket (less than $75,900 for married couples, in 2017,) you may not have to worry about CGT. You can take advantage of other tax deductions (e.g., mortgage interest, medical expenses) to stay below the threshold.
Even if you’re in this category, you have to be careful about the amount of assets you’re selling at one time combined with your total income (e.g., from part-time work,) to avoid pushing yourself into a higher tax bracket.
In addition, this tax law only applies to federal taxes so you may still have to pay a state income tax. Taking advantage of this tax break may affect your ability to qualify for other tax credits or your social security benefits.
2. Harvest your losses
You can offset capital gains by selling off “losers” in your stock portfolio. If the losses are greater than your gains, you can deduct up to $3,000 per year and carry the excess over into future years.
The problem with this strategy is that your losses have to be greater than your gains — which means you aren’t making any money — and the $3,000 per year cap isn’t much if you have a sizable portfolio.
Not to mention, it could be quite a gamble to let go of what appear to be losers in a such a volatile market when you don’t have much visibility into how they’d perform the next day or the next month.
3. Gift your stock
You can gift up to $15,000 worth of stock to a family member who is in a lower tax income bracket (e.g., a child or retired parent) so when he or she sells the stock, they won’t have to pay any CGT.
You can also gift appreciated stock to charities to avoid CGT and get the income tax deduction for the fair market value of the stock.
Tax laws on gifting have been changing quite a bit (e.g., the new tax law that applies trusts tax rates to “kiddies”) and there’s a limit to which you can gift so be sure to check the latest development before allocating your assets.
4. Move to a tax-friendly state
It may sound a bit extreme to relocate just to avoid paying capital gains taxes. However, if you have plans to move to a state without an income tax, such as Florida or Nevada, consider holding off a sale so you don’t have to pay a state CGT.
Of course, relocating your home and uprooting your family isn’t practical for most people. Plus, there’s no guarantee that a state which may well be tax-friendly today won’t start imposing a state CGT tomorrow!
5. Invest in an Opportunity Zone
When you invest in an Opportunity Zone fund, you can achieve three substantial tax benefits.
- Defer all 2018 capital gains for 8 years if the profits are reinvested and held in an Opportunity Zone.
- Decrease the amount of such capital gains taxes by 10% and 15% if the investment is held for five and seven years respectively.
- Get a full exemption from capital gains tax on all future capital gains on the invested funds if an investment is held for 10 years, starting in 2018.
The goal of these funds is to incentivize investments in housing, small businesses, and infrastructure in economically-depressed areas across the US.
Besides capital gains from the sale of stocks, you can also roll the gains from selling other assets, such as real estate and bonds, into an Opportunity Zone investment.
The types of businesses eligible for Opportunity Zone funds are quite wide-ranging, so you can select investments that are low in risk and high in return.
For example, buying older buildings in Opportunity Zones, renovating them at a reinvestment cost, then managing them as rental properties is one of the most high-yielding strategies you can use to take advantage of this new tax bill.
When you purchase real estate in Opportunity Zones, you have the potential to buy properties that are dramatically cheaper than other parts of the the US due to their location.
However, not all opportunity zones are created equal, and there are a number of places, like Puerto Rico for example, that qualify for opportunity zone investing that have huge upside potential as it is a growing tourism destination that commands very high rents.
Without any limit in the amount you can invest or the state in which you reside, investing in Opportunity Zone funds is by far the most straightforward, versatile, and profitable way to make your taxes work for you, rather than just handing them over to the government.
For more detailed information, we’ve created a FAQ on the new opportunity zone regulations from the IRS and what that will mean for investors.
Opportunity zones provide all taxpayers with capital gains to pay a simple and effective way to defer your tax payment and invest into a potentially lucrative market that has not existed before.
In short, if you have capital gains to pay, don’t. You can make a significant return on your investment by placing those tax dollars into an opportunity zone fund.
A not-to-be-missed investment opportunity
Here at Lifeafar, we’re excited to be negotiating several multi-million dollar real estate deals in Puerto Rico. These projects are the perfect investment vehicles for anyone with capital gains to invest in an Opportunity Zone.
These investments in Old San Juan will be converted into hotels and vacation rental properties to benefit from the booming tourist economy on the Caribbean island.
With the combination of tax benefits, opportunity zone qualification and increasing demand for hotel rooms, we’re estimating returns between 15% – 20% on your investment.
Want to learn how to defer your capital gains tax and invest in Puerto Rico?
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