Selling your real estate, stocks, and securities for a capital gain is a wonderful thing, after all making a profit is the whole point. But before Uncle Same comes to take his cut you may want to use a little strategy to avoid paying more tax than you want to. Yes, you can lower you tax bill, but it will require knowing how to better time purchases, sales, and understand tax rules.

Long-term and Short-term capital gains

When you sell an investment such as real estate or stock for a profit, it’s called a capital gain. A long-term capital gain is made on an asset you owned for at least 366 consecutive days.

Long-term capital gains are taxed at more palatable rates than short-term gains. Short-term capital gains are taxed as ordinary income, while, the IRS will reward you for holding on to your investment for a longer period of time by reducing your long term capital gain tax rate to the following:

Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
15% $38,600-$425,800 $77,200-$479,000 $51,700-$452,400 $38,600-$239,500
20% Over $425,800 Over $479,000 Over $452,400 Over $239,500

Data source: Tax Cuts and Jobs Act.

For example, if you are single and earn $50,000 annually and you sell a stock for a gain (that you’ve held for less than year) you will pay 7% less tax on that gain (22%-15%=7%)

Short-term capital gains are taxed as ordinary income, which means any income you receive from investments held for less than a year must be included in your taxable income for the year.

2018 tax brackets:

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $600,000

Data source: Joint Explanatory Statement of the Committee of Conference.

Simple Ways to Cut your Tax Bill

Sell Losing Stocks

If you have sold investments for a gain, you can offset these realized gains by selling stock that isn’t doing as well, capturing these losses to reduce your income. This can be done using a long term strategy for the stocks or funds you plan on holding long term in a process called ‘harvesting’. It works like this: You plan on holding XYZ fund/stock for a very long time, however, you also want to reduce you tax bill this year. Sell (aka Harvest) and take the loss for your reportable income this year, and repurchase it later — as long as it hasn’t shot up beyond you buy-up-to price. The only stipulation here is you cannot repurchase it within 30 days due to a regulation called the wash-sale rule.

Delay 

If your income fluctuates year to year, save the sale of any investments for a lower income year. Your capital gains tax is determined by income levels, so delaying can make sense in some situations.

Donate

Take any gain from a security you’ve held for more than a year and donate it. Receiving a charitable deduction for the market value and avoid having to pay capital gains. Most brokers such as Schwab and Fidelity have accounts available to help you do this.