How do I avoid capital gains tax?

On this episode of A Wiser Retirement® Podcast, Casey Smith and Shawna Theriault, CFP®, CPA, CDFA® discuss various methods to minimize capital gains taxes, especially during retirement. Key strategies include gifting appreciated assets to charities, 1031 exchanges, and converting IRAs to Roth accounts during specific timeframes. Proper education and planning can help investors maximize their financial benefits while minimizing their tax liabilities.

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Short Term vs Long Term Capital Gains

Capital gains tax applies to appreciated securities like stocks and is taxed at rates lower than ordinary income tax. The duration an asset is held determines if the gains are short-term or long-term, with long-term gains benefiting from lower tax rates.

Tax-Loss Harvesting and Direct Indexing

An effective approach to reducing capital gains taxes is through tax-loss harvesting and direct indexing. Tax-loss harvesting involves selling stocks at a loss to offset gains, with losses carrying forward for up to 40 years. Direct indexing allows investors to exploit losses within a portfolio to offset future gains.

Gifting Assets to Charities or Family Members

Gifting appreciated assets to charities or family members can help avoid paying taxes on gains. When an individual passes away, heirs can benefit from a step-up in cost basis, effectively erasing any capital gains. Holding onto appreciated stocks as long-term investments or transferring assets to heirs can maximize this benefit.

1031 Exchange

The discussion also touched on real estate investments and the tax implications of selling properties. For those looking to sell a secondary property and buy another, a 1031 exchange can defer capital gains tax by reinvesting the proceeds into a like-kind property. However, this complex transaction requires professional assistance and must meet specific criteria. For primary residences, tax exemptions can help individuals avoid capital gains tax, provided the gain falls below certain thresholds.

Financial Planning and Tax Considerations

Integrating tax considerations into financial planning is essential but often overlooked by financial advisers. Effective financial planning requires coordination between financial advisors and tax preparers to minimize capital gains tax effectively. Estate planning also plays a vital role because the way assets are titled can significantly impact capital gains tax.


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