Create Your Tax Strategy Before Buying or Selling a Major Asset
Tax planning is most effective when it begins before a major asset purchase or sale. By planning ahead, you can identify strategies to reduce taxes and improve after-tax results while more options are still available.
Here’s a summary of how different assets are taxed, and why you should consider scheduling a tax planning session before buying or selling your next asset.
How assets are taxed: The general rule
If you sell your property for more than what you bought it for, you’ll get a tax bill. How much your tax bill will be depends on the following factors:
How long you own the property. If you sell your asset(s) LESS than one year after purchasing it, your tax will be calculated based on short term capital gain tax rates. If you sell your asset(s) MORE than one year after purchasing it, your tax will be calculated based on long term capital gain tax rates.
Your adjusted gross income. Short term tax rates can range from 0% to 37% while long term tax rates can range from 0% to 20%. If your income is high enough, there is also a 3.8% surtax on investment income on top of the short term or long term tax rate.
Different assets, different rules
The taxes applied when you sell an asset also fluctuate depending on the type of property it is:
Securities, bonds & funds. You can only take $3,000 in excess losses in one year to reduce your earned income. On the other hand, you can net losses with gains from the sales of other stocks.
Cryptocurrency. Virtual currency is treated just like stocks for tax purposes – you must recognize any gain or loss on every virtual currency transaction. There’s also a yes-no question at the top of page 1 of Form 1040 that asks if you sold, exchanged, gifted, or otherwise disposed of a digital asset during the tax year in question.
Primary home. When you sell your primary home, you can exclude the first $250,000 of taxable gain if you’re single or $500,000 if you’re married. You must own and live in your primary home for 2 of the previous 5 years to qualify for this tax break.
Rental properties. When selling a rental property, you could be hit with both short term tax rates and long term tax rates. You’ll also discover a tax term called depreciation recapture, which could significantly increase the amount of tax you owe on your property.
Collectibles. Instead of using the long term capital gains tax rates outlined above, gains on the sale of collectable items is subject to a 28% tax rate.
Schedule a tax planning session
So before buying or selling your next asset, schedule a tax planning session to identify tax saving opportunities while they’re still available.
And remember to keep accurate records when you buy and sell an asset, in addition to any changes or improvements made to the asset. Great documentation is the key to proving whether taxes are due when you sell and which tax rate applies.