Many of our readers will agree with me that capital gains tax is economically senseless. This particular type of tax only serves to trap individual’s wealth in an investment vehicle, which takes complex ploys to free up the capital without any kind of penalty. Fortunately, there are a range of ways you can avoid having to pay capital gains. Just be aware that none of them will benefit the economy as a whole.
Match Your Losses
One way to offset or cancel your gains for a particular year is to match your losses. As you invest, you may be able to harvest your capital losses as and when they occur, and then use these to pay both current and future taxes. Your excess losses up to $3,000, which haven’t been used to cancel your gains, can offset your regular income. The remainder can then be stored and re-invested indefinitely. This particular loophole encourages many investors to sell off excellent vehicles for their capital during temporary slump, only to buy them back a month or so later.
The 1031 Exchange
If you sell investment or rental property, one great way to avoid depreciation recapture and capital gains tax is pumping the proceeds from that sale into a replacement property within 180 days. This exchange is known as the 1031 exchange, after a related section of the US tax code. Although there are a lot of complex rules surrounding a ploy like this, and you may not always qualify, it’s one of the most effective ways to assure that you can dodge capital gains tax.
Similar to the 1031 exchange, if you have any securities which have appreciated greatly, you may be able to exchange these for a portfolio that’s of the same value, but more diversified. Carrying out one of these exchanges requires either friends in high places, or a pretty sizable up-front investment. However, the money you put down will enable you to avoid dodging even higher capital gains taxes. Remember though, that this is an entire process created by government taxation. If there were no capital gains taxes in the first place, all of that valuable capital could be used to stimulate individual economic growth.
Primary Residence Exclusion
A lot of people aren’t aware of it, but it’s possible to exclude up to $250,000 worth of capital gains taxes from the sale of a primary residence. This amount is doubled for a married couple. The major drawback here, of course, is that it requires you to move to another primary residence in order to reap the discount. When individuals or families stay in the same residence for decades, they have to pay a lot more tax, which more mobile individuals and family units can avoid. However, if you place no major sentimental value on your primary residence, and you need to free up a large amount of capital, it may be worth going through the stress of moving to avoid capital gains. However, needlessly selling and buying property like this is a major strain on the economy.