If you have highly appreciated assets, you will eventually owe capital gain taxes on them. However, the timing of your sale can significantly impact your final tax burden. Capital gains are the profit made when selling an appreciated asset. Appreciation of an asset is not considered taxable until the asset is sold and the profit is realized. Currently, no taxes on unrealized gains exist at the federal level, so no capital gains taxes apply until an asset is sold.
By being strategic about your timing when selling appreciated assets, you can lower your tax liability or spread it out over several years, maximizing your investment.
Strategic Timing 101
When it comes to tax planning, the most significant step you can take is to ensure your gains are long-term instead of short-term. Short-term capital gains are taxed at the normal income rate, which can be as high as 37%, depending on your state and income level. Long-term capital gains are taxed more favorably, with taxes at 15% or 20% based on your income bracket.
You must hold your asset for at least a year to qualify for long-term capital gains tax rates. So, if there are no other incentives to sell, consider holding onto your asset until you can receive this tax advantage.
Harvesting Losses
Not every investment will be a winner, even for the most savvy investors. Federal tax regulations allow you to offset up to $3,000 in gains with $3,000 in losses realized in the same year. If you have underperforming assets, it can be advantageous to realize some of those losses to offset your gains.
It is important to note that you cannot offset long-term gains with short-term losses. The gains and losses must be the same type. Only long-term losses can offset long-term gains. So paying attention to the timing of both your appreciated and underperforming assets is critical.
For example, if you have sold a short-term asset for $10,000, and you have held another stock for 11 months and it isn’t performing well, you might want to consider selling that stock at a loss before the one-year mark so that you can offset up to $3,000. In this scenario, you would only pay taxes on $7,000 of gain rather than the full $10,000.
Be Aware of Your Tax Bracket
If you hold appreciated assets, you should be aware of the income threshold for long-term capital gains. The highest 20% rate doesn’t kick in until your income nears $500,000. If you can delay your taxes until you are in a more favorable income bracket, you could save a significant amount of money.
Keep in mind that high-income earners may also be subject to the 3.8% Net Investment Income Tax (NIIT). In 2024, the threshold for NIIT was $200,000 for single earners and $250,000 for married earners filing jointly.
Consider Your Heirs
If you are aging and your primary concern is leaving a legacy for your heirs, being intentional with your estate tax plan is wise. Current federal law stipulates that unrealized gains passed on to your heirs after death will receive a “step-up in basis.” That means that when you die and your heirs receive your assets, the cost basis will be stepped up to its current market value. So, if they were to sell the asset, the profit would not be recognized as a capital gain and would not be subject to taxes.
If the “death tax plan” is something you want to take advantage of, it is important that you don’t add your children to your bank account or the deed to your house, as they would invalidate this benefit. Talk to a qualified capital gains tax advisor about how to best set up your estate to minimize taxes for your heirs.
Strategically Defer Your Taxes
To optimize timing for your tax benefit, consider using a strategy to defer the realization of your capital gains. If you can delay receiving your capital gains or spread out your gains over time, you can delay or reduce your taxes. One such strategy is a Deferred Sales Trust.
A Deferred Sales Trust is a form of an installment sale trust, where instead of selling your highly appreciated asset directly to a buyer, you sell to a third-party trust that sells the investment and collects the proceeds on your behalf. Because you have not directly received any profit, you do not owe any capital gains. You can then have the trust reinvest all your proceeds or pay you the profits over time in a series of installments. You will only owe taxes on the proceeds you receive from the trust each year. This strategy has the potential to reduce your overall tax liability if it keeps you in a lower tax bracket, to spread your tax burden out over time, and to maximize your returns by giving you the ability to reinvest all of your profits before losing any to taxes.
Work With a Qualified Professional
If you are a high-net-worth individual or have highly appreciated assets, consult with a capital gains tax advisor before implementing any of these strategies. Timing is not the only factor when considering when and how to cash in on your investments. Here at Capital Gains Tax Solutions, we can evaluate your investments and help you devise a strategy to maximize your returns and secure your future.
Infographic
Timing the sale of appreciated assets can significantly impact your tax burden. Being strategic about it can help lower your tax liability or spread it out over several years, maximizing your investment. Learn more in this infographic.
