3 Capital Gains Tax Exemptions

When it comes to paying capital gains tax, there are certain exemptions that you can use in order to lower your tax liability or get out of it altogether. Capital gains occur when an asset that you own increases in value and you make a profit from the sale of that asset. Here are some of the capital gains tax exemptions that you may want to consider when you have valuable assets.

1. Home Sale Exemption

Perhaps the most popular and potentially most profitable capital gains tax exemption involves your primary residence. When you sell your primary residence for more than you paid for it originally, you may be able to get out of paying capital gains taxes on the amount that you made. In order to qualify for this exemption, you have to have lived in the house for two out of the last five years. Therefore, if you buy a house and live in it for two years, you could sell it for profit and pay no taxes. This allows you to get as much as $125,000 in profit without paying a dime of capital gains taxes.

This is a great way to make tax-free income during a good real estate market. Some people will buy a house, fix it up, and live in it for two years only to turn around and sell it for a profit. By using this strategy, you can slowly upgrade your house every two years and put some money in your pocket.

2. Charitable Donations

Another capital gains tax exemption exists for those that want to give their assets to a charitable organization. If you give appreciated assets to a charity, you will not have to pay capital gains taxes on the amount of the increase in value. For example, let's say that you originally purchased some stock for $10,000 over 20 years ago. Today the stock is worth $100,000. You decide to give that stock to a charity as a donation. This will get you out of paying capital gains taxes on the $90,000 in increased value. You will also be able to take a tax deduction on the amount that you donate to the charity up to 50 percent of your annual income.

3. Offset with Losses

Another way that you could potentially get out of paying capital gains taxes is to offset your capital gains with capital losses. This strategy is commonly used by individuals who trade the stock market or other securities. When you have a capital loss, you can use that to offset any capital gains that you may have. For example, if you have a $20,000 gain in the stock market as well as a $15,000 loss in the stock market, you will only have to pay capital gains taxes on $5000. You can even keep capital losses for the next year if you want to spread them out over an extended period of time.

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