How to Avoid Capital Gain Taxes

by Rocco Pendola, Demand Media

    When you sell a "capital asset," most commonly property or another investment, the IRS notes that you trigger a capital gain or loss. Generally, you must report capital gains to the IRS at tax time. In many cases, you'll need to pay a capital gains tax--the exact amount varies based on several factors, including your tax bracket, the year and the mood of Congress. There are ways, however, to legally skirt this unpleasantry.

    Step 1

    Exclude up to $250,000 if you use single filing status and up to $500,000 if you file a joint return from the capital gain on the sale of your home. The IRS requires that you have lived in the home for at least two years as your primary residence. Examples: if your home sale capital gain was $265,000, you must pay the capital gains tax on $15,000. If you realized a capital gain on the sale of a beach house you must report it; it's not your primary residence.

    Step 2

    Limit your stock trades. When you trade stock in a taxable account, you trigger reportable capital gains when you make winning trades.

    Step 3

    Invest in an IRA. In this case, you can trade stocks as often as you like. In both Roth and traditional IRA accounts, the IRS allows you to defer taxes on your capital gains, as well as other earnings. With a traditional IRA, you'll pay regular income tax, not the capital gains tax, when you access your money. With a Roth, however, IRS Publication 590 notes that you won't have to pay taxes at all, even on earnings, if you wait until you are 59 1/2 to take withdrawals and you have held your account for a minimum of five tax years.

    Step 4

    Donate shares of stock to charity. As William Baldwin advises at Forbes.com, if you bought shares of stock for $2,000 and they are now worth $10,000, you can donate them, claim a $10,000 tax deduction and not pay the capital gains tax on the $8,000 difference.

    Tips

    • As of 2010, you can deduct up to $3,000 worth of capital losses from the sale of stocks from your taxable income. You can use capital losses to offset stock-related capital gains. If you exceed $3,000 in losses, you can carry the excess over to future years. You cannot, however, deduct a capital loss from the sale of your main home, according to the IRS.
    • As the IRS advises, if you can exclude your entire home sale capital gain from the capital gain tax, you do not have to report the sale on your tax return.

    About the Author

    As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.