If you own highly appreciated assets, managing capital gains tax is critical to managing your overall tax burden. Depending on your state, you could over 30% in taxes on gains. Fortunately, by working with your financial advisor and CPA, you can explore strategies to mitigate this liability. Hear more from Opes Wealth Co-President Erin Whalen:
What Is a Capital Gain?
A capital gain is the difference between what you originally paid for an asset and its value today. For example, if you paid $1 million for your house several years ago, and its value has increased to $2 million, selling the home would result in a gain of $1 million. Discover potential ways to offset capital gains liability when selling your primary residence in this article.
How to Mitigate Capital Gains Liability Under Current Tax Law
Reviewing your assets and determining which may be subject to capital gains taxes is essential. With a $1 million gain in the example above, you could face over $300,000 in capital gains taxes on the sale of your non-primary residence home.
However, if you don’t need immediate access to certain highly appreciated assets, you may consider passing them to your heirs to help reduce this liability. When inherited, your heirs benefit from a step-up in basis, which adjusts to the asset’s current market value at the time of the original owner’s death.
For that scenario, if you purchased a house for $1 million and the fair market value at the time of your death is $2 million, the heir’s basis on the property would be $2 million. This could significantly reduce or even eliminate the capital gains liability for the heir if they choose to sell it shortly after inheriting it.
Assessing Capital Gains Tax Liability
Evaluating tax liability, especially when transferring wealth from generation to generation, is critical, and we recommend consulting your financial advisor and CPA to navigate tax complexities. At Opes Wealth, we specialize in helping clients in high-tax states identify challenges and opportunities in their planning.
With over 20 years of experience, Erin has guided clients through the intersections of financial decisions, from investments to real estate and even seemingly non-financial decisions with significant downstream financial implications.
If you want to explore our comprehensive wealth management approach, please connect with our team or take the first step by completing our wealth assessment. We’d love the opportunity to learn more about you.
Audio Transcript:
Erin Whalen (00:00 – 02:05)
Let’s talk about the impact of managing capital gains tax liability when considering the transfer of wealth from generation to generation. I’m Erin Whalen of Opus Wealth Management. Have you ever actually sat down and calculated the entire embedded capital gains tax liability across all of your assets? Over one third of the capital gain that you’ve appreciated over time will ultimately be paid in taxes, unless you find ways to mitigate that. As a refresher, capital gain is simply the difference between what you paid for an asset and its value today. And typically, depending on the state, you can be paying up to a third of that capital gains in taxes. Fortunately, there are some ways to mitigate that, particularly if you’re considering an asset that you don’t necessarily need to benefit from. That’s highly appreciated. Because if you pass it on to your heirs, there’s something called a step up in basis. And what that means, for example, is if you bought a home many years ago for $1 million and it’s now worth 2 million, if you sold that today with $1 million gain, you’d be looking at over $300,000, potentially in capital gains taxes. But if you pass that asset on to your heirs, the cost basis steps up, meaning that the new cost basis is the same thing as the value. And if they then sell it after you’re passing, there’s no capital gains tax liability at all. So really critical to think about your overall balance sheet, thinking about where you have embedded gains assets you need to benefit from today and those that it makes sense from a capital gains tax perspective to pass on to heirs before you actually sell them. Always a good idea with complex matters like this to consult with both your financial advisor as well as your CPA.
Written by: Erin Whalen, Co-president
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