Capital gains taxes are an expense that can increase the cost of selling real estate assets. If you sell your assets for a profit, you’ll owe a certain amount–0%, 15%, or 20% of the proceeds--to the IRS. Additionally, depreciation recapture (taxed up to 25%) and the 3.8% Net Investment Income Tax (NIIT) may apply, depending on income level and prior deductions.
It’s possible to take steps to lower capital gains taxes. Doing so requires understanding the tools to reduce those liabilities while remaining compliant with the IRS.
Capital gains tax is assessed on capital assets held for one year or longer before they’re sold. The profits from the sale are classified as long-term capital gains, which are taxed at the above-mentioned 0%, 15%, or 20%. How much capital gains tax you owe depends on the profit you receive from an asset sale and your income tax bracket.
The chart below outlines the 2025 tax brackets and their corresponding capital gains taxes.
|
Tax Rate |
Single Filer Income |
Married, Filing Jointly Income |
|
0% |
$0 to $48,350 |
$0 to $96,700 |
|
15% |
$48,351 to $533,400 |
$96,701 to $600,050 |
|
20% |
$533,401 and higher |
$600,051 and higher |
Advanced planning and strategizing could help reduce taxes on your capital gains. Tools to use for this purpose can include the following.
Using deductions. Many deductions are available that can help reduce your taxable income. These include (but aren’t limited to) mortgage interest rates, property depreciation, home business expenses, student loan interest deductions, or medical expenses.
Investing pre-tax dollars. Contributions to 401(k) retirement plans, Individual Retirement Plans (IRAs), or Health Savings Accounts (HSA) are made with pre-tax dollars. This allows you to reduce your current overall income and may reduce your tax bracket. But keep in mind that you will be taxed on withdrawals.
Considering a 1031 exchange. If you’re selling investment or business real estate, exchanging that asset for a like-kind one of equal or greater value allows you to potentially defer capital gains taxes. While this doesn’t eliminate or reduce taxes, it could be a strategy that helps you keep more income for additional investments.
Utilizing tax-loss harvesting. It’s possible to reduce your taxable income by applying capital losses from selling other assets. But remember that long-term capital losses can only be used for long-term capital gains.
Employing the primary residence exclusion. If the property you sold was used as your primary residence for at least two of the preceding five years, you could be eligible to take the section 121 exclusion. This allows you to exclude the following in capital gains:
While you can mostly count on tax liabilities if you sell an asset, there may be ways to reduce the burden. Reducing your taxable income could put you into a lower tax bracket, which might lower what you owe to the IRS.
Your best bet is to work with a tax professional or financial advisor who can help you develop a compliant strategy to reduce tax liabilities while maximizing your investments.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.