Although it is often said that nothing is certain except death and taxes, informed planning can help you avoid or minimize capital gains taxes. Talking to your estate planner about options can result in significant savings.

What is capital gain? Capital gain is the difference between the “basis” in property and its selling price. The basis is usually the purchase price of property. If you purchased a house for $250,000 and sold it for $450,000 you would have $200,000 of gain. It is important to note that basis can be adjusted to include capital improvement expenditures.

How much is the tax? Most taxpayers fall into the 15% capital gains tax rate. There are three main exceptions. First, property owned for less than a year is subject to short-term capital gains tax rates, which mirror income tax rates. Second, earners in the 10% or 15% income tax brackets (for 2016) have 0% federal tax on capital gain. Third, earners in the 39.6% income tax bracket (for 2016) are subject to a 20% federal capital gains tax rate.

The personal residence exclusion. Up to $250,000 of gain on the sale of your personal residence can be excluded ($500,000 for married couples). To qualify, you must have lived in and owned the house for at least two out of the five years prior to the sale. If you are a nursing home resident, the two-year requirement is reduced to one year.

Carry-over basis. If someone gives you property, you receive it with his or her basis. Thus, if your parents give you the vacation home they bought years ago for $25,000 and its fair market value is now $500,000, your basis will be $25,000. If you sell it at market value, you will have a taxable capital gain of $475,000 and no personal residence exclusion, unless you move in for two years before selling.

Offsetting losses. Each year you can offset capital gains with capital losses to minimize taxes. For example, if you sell the vacation house for a gain, you could also sell stock that has gone down in value, creating a loss that offsets the gain on the house sale. In some instances, you can carry over loss from one tax year to the next to offset future gains.

Step-up in basis. By comparison, the basis of inherited property is its date of death value. Thus, inheriting that vacation home from your parents would result in its basis being adjusted to $500,000. If you sell the house for market value, you will not have taxable capital gains. An advantage of basis step-up is also administrative. It is often easier to determine the value of assets upon death than it is to establish what the deceased originally paid for the property.

To learn more about eliminating capital gain taxes with proper estate planning, please contact Kling Law Offices for a free consultation. By understanding and considering these rules, you can save on capital gains taxes and avoid possibly expensive mistakes.