Home Capital Gains Tax Deferring and Reducing Capital Gains Taxes

Deferring and Reducing Capital Gains Taxes

Deferring and Reducing Capital Gains Taxes

Capital gains taxes can be an unpleasant surprise for many investors. Taxes can thwart your investment strategy, and leaving them untouched can have a considerable impact on your portfolio’s performance. However, there are ways to defer and reduce capital gains taxes that investors can use to realize higher after-tax returns.

Capital gains taxes are imposed on the profit realized from selling assets such as stocks, real estate, or collectibles. The tax rate for capital gains depends on the length of time the asset has been held and the investor’s income. Depending on the investor’s tax bracket, the maximum tax rate on long-term capital gains can be as high as 20%.

Planning and being aware of applicable tax rules can help minimize capital gains taxes for investors, allowing them to keep more of their earnings.

In this article, we’ll go through some strategies that you can use to defer and reduce capital gains taxes.

1. Deferring Capital Gains Taxes using 1031 exchanges

One popular strategy investors use to avoid capital gains taxes is a 1031 exchange. A 1031 exchange allows investors to defer taxes on the sale of investment properties by reinvesting the proceeds into a replacement property. The idea behind this is: if an investor sells one investment property, they can use the proceeds to purchase a new investment property without realizing any capital gains taxes.

To be eligible for a 1031 exchange, the following conditions must be met:

• Both the old property and the new property must be considered for investment purposes or productive use in business.
• The investor must follow strict rules and regulations related to proper timing and the amounts involved in the exchange.
• The properties involved must have a similar value.

Additionally, the investor must appoint a Qualified Intermediary (QI) as an independent third party to facilitate the exchange.

One of the benefits of a 1031 exchange is the ability for the investor to compound their investment returns without suffering any tax consequences. Also, there is no limit to the number of times you can use 1031 exchanges to defer capital gains taxes.

2. Deferring Capital Gains Taxes using Opportunity Zone Funds

Opportunity zone funds are a relatively new option included in the Tax Cuts and Jobs Act of 2017. The act was created to help drive investment into certain economically distressed areas. Investors who invest in designated opportunity zones can defer, or in some cases, eliminate capital gains taxes.

Opportunity zones were set up to incentivize investors to invest in low-income areas. Investors are offered a chance to invest capital gains into opportunity zones through opportunity zone funds.

Once invested, the capital gains are deferred until the fund investment is sold, or by December 31st, 2026, at the latest. If the investor holds the investment for at least 10 years, they can make it completely tax-free.

To be eligible for these tax incentives, the investor must invest in a qualified opportunity zone fund, and the fund must invest at least 90% of its total assets in qualified opportunity zone property.

The benefits of opportunity zone funds are clear. Investing in opportunity zone funds is not for everyone, as it comes with risk. Additionally, it requires considerable time, knowledge, and effort to understand the tax code and appreciate the potential benefits of opportunity zone funds.

3. Reducing Capital Gains Taxes through Loss Harvesting

Loss harvesting is an investment strategy that investors can use to realize losses on investments to offset capital gains taxes. To accomplish this, investors sell losing investments and use the capital losses to offset capital gains resulting from the sale of profitable investments.

When this is done, the investor can use the losses to offset the profits that are generated from their other investments. This allows the investor to reduce their overall taxable income within the year, and if the losses exceed gains, this can be carried forward.

Loss harvesting can be done at any time, but usually, investors do this at the end of the year when they have a better understanding of their taxable income.

If you’re looking to reduce your capital gains taxes via loss harvesting, there are three key aspects to keep in mind. First, be aware of the wash-sale rule. Investors have to avoid buying back the same or a substantially identical investment within 30 days after selling it. Secondly, making sure to harvest the right amount of losses or gains depending on your tax bracket is important. Finally, it’s essential to use harvesting as part of a larger investment plan to get the most out of the strategy.

4. Reducing Capital Gains Taxes through Charitable Donations

Charitable donations offer investors a way to reduce capital gains taxes while giving back to causes that they care about.

When an investor donates appreciated assets, such as stocks or artwork, to a qualifying charitable organization, they are eligible to write off the fair market value of that asset as a charitable contribution on their tax return.

By doing this, the investor can reduce taxable gains from the asset donated, leading to more tax savings.

The most common type of charitable donation is cash. However, donating appreciated stock or other investments can provide even more significant tax benefits. The charitable organization can sell the donated investment without incurring any capital gains taxes, and the investor who donated the asset can get a tax deduction on their donation.

5. Reducing Capital Gains Taxes through qualified small business stock (QSBS)

Another way that investors can reduce capital gains taxes is through qualified small business stock (QSBS) investing. Companies that qualify as small businesses can offer QSBS. These are shares of stock that qualify for tax incentives when sold.

The Tax Increase Prevention and Reconciliation Act (TIPRA) and the the Jobs Act introduced several provisions that offer preferential tax treatment for QSBS.

There are rules involved in determining if an investment is in qualified small business stock. Some of the rules include:

• The business must actively operate in certain industries, primarily taking part in the development or creation of technology.
• The business must meet requirements related to the amount of assets they have, income, and employees.
• The investor must hold the stock for at least five years.

Investors can exclude up to 100% of capital gains on QSBS they make when they sell. The amount of the exclusion depends on the time they held the investment.

Conclusion

Investors can use these strategies to reduce or delay capital gains taxes and increase their portfolio rate of return. Each strategy has its unique challenges, benefits, and risks. Investors should consult with financial advisors and tax consultants to determine which strategy is best for their investment goals and personal situation.

By learning and implementing these tax deferral and tax reduction strategies, investors can minimize the impact of capital gains taxes on their earnings. Following these strategies can also help investors stay aligned with their investment strategy and achieve long-term financial goals.


There are several ways that investors can lower their capital gains rate of taxes. Whenever possible, investors should take part in long term investments. Long term investments must be held by the investor for at least three hundred and Sixty five days after the date that the investment was purchased.

The day of purchase does not count toward the year. If however, investors sell an investment before that year is up, they will likely have to pay a capital gains rate of taxes that matches their income tax rate. Investors can offset their capital gains rate of taxes by deducting any capital losses. In addition, investors can defer taxes by utilizing the Section 1031 Exchange. There are many ways that investors can reduce or defer capital gain taxes, but their method will depend on their specific circumstances.

When deducting capital losses to adjust a capital gains rate of taxes, investments must be of a similar length. Short term capital losses can be subtracted from short term capital gains and long term capital losses can be subtracted from long term capital gains. The Section 1031 Exchange allows investors to defer capital gain taxes if they take specific actions with the income from their investment. Investors must take their total profit, or capital gain, and invest that money into a similar property, or property that is of similar value to that which was sold.

However, many experts  warn that it can be extremely difficult to find a similar property as a replacement, especially when it is a business. Investors must also find a similar structure, of the same value, within one hundred and eighty days from the date that they made a profit from the other property. In addition to making the purchase within that time frame, there are other rules investors must follow in order to lower their capital gains rate of taxes or to defer those taxes. However, savvy investors should become aware of all of the rules that govern allowances for deferment on capital gains taxes.

In order for investors to defer or reduce their capital gains taxes, they must examine federal and state tax laws that apply to their specific circumstances. Each investor will have circumstances that differ, which means that different laws may apply. In addition, capital gain rate of taxes will vary according to an individuals income, if the profit was made from a short term investment. In order to reduce capital gains taxes, investors must keep records to be sure that they take full deductions for capital gain losses.