How to Avoid Capital Gains Tax Over 65

Capital gains tax is a levy on the profit realized from selling an asset, such as investments or real estate. This tax applies when an asset is sold for more than its original purchase price or adjusted cost. The difference between the selling price and the asset’s basis, which includes the purchase price plus certain improvements, constitutes the capital gain. For individuals over 65, understanding strategies to minimize or eliminate this tax is an important part of financial planning.

Selling Your Home

Selling a primary residence can result in a capital gain, but tax provisions can reduce or eliminate this burden. The IRS Section 121 exclusion allows homeowners to exclude a portion of the gain from their taxable income. This exclusion can be up to $250,000 for single filers and $500,000 for married couples filing jointly.

To qualify for this exclusion, homeowners must meet both an ownership and a use test. The ownership test requires owning the home for at least two of the five years preceding the sale. The use test mandates the home was used as the primary residence for at least two of the five years prior to the sale. These two-year periods do not need to be consecutive, but both tests must be satisfied within the five-year window ending on the sale date.

The exclusion applies only to the gain on the sale, not the total sale price. For example, if a married couple sells their home for a $450,000 gain and meets the eligibility criteria, the entire gain would be excluded from taxation. If their gain were $600,000, $500,000 would be excluded, and the remaining $100,000 would be subject to capital gains tax.

Managing Investment Gains

Individuals can employ several strategies to manage capital gains from investment portfolios. Tax-loss harvesting involves selling investments at a loss to offset capital gains. These losses can offset capital gains dollar-for-dollar.

If capital losses exceed capital gains, up to $3,000 of the excess loss can be deducted against ordinary income each year, or $1,500 if married filing separately. Any remaining capital losses beyond this limit can be carried forward to offset capital gains or ordinary income in future tax years. The “wash-sale rule” disallows a loss if a substantially identical security is purchased within 30 days before or after the sale date, creating a 61-day window.

Another strategy for managing investment gains is the “step-up in basis” rule. When appreciated assets are inherited, their cost basis is adjusted to their fair market value on the date of the original owner’s death. This adjustment eliminates capital gains tax on appreciation that occurred during the deceased’s lifetime for heirs when they sell the asset.

For instance, if an asset purchased for $100,000 is worth $500,000 at the owner’s death, the inheritor’s new basis becomes $500,000. If they then sell the asset for $500,000, no capital gains tax is due on the $400,000 appreciation that occurred prior to inheritance. This rule applies to capital assets like stocks and real estate, but not to assets held within retirement accounts.

Donating Appreciated Assets

Donating appreciated non-cash assets to qualified charities avoids capital gains tax. When assets like stocks or mutual funds, held for over one year, are donated directly to an eligible charity, the donor avoids capital gains tax on the appreciation.

Donors can also claim a charitable deduction for the fair market value of the donated asset. This deduction is subject to limitations based on the donor’s adjusted gross income (AGI) and whether they itemize deductions. For contributions of appreciated long-term capital gain property to public charities, the deduction is limited to 30% of the donor’s AGI.

A qualified charity is an organization recognized by the IRS as a 501(c)(3) entity, operating for religious, charitable, scientific, literary, or educational purposes. Donating appreciated assets can allow for a larger overall gift to the charity compared to selling the asset, paying capital gains tax, and then donating the remaining cash.