But what about retirement accounts and Social Security income? Are there still tax advantages to be had for seniors?
Capital gain tax over 65: does your age affect how much you pay?
Since the tax break for over 55s selling property was dropped in 1997, there is no capital gains tax exemption for seniors. This means right now, the law doesn’t allow for any exemptions based on your age.
Whether you’re 65 or 95, seniors must pay capital gains tax where it’s due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the ‘tax basis’.
The Taxpayer Relief Act of 1997 increased the range of capital gains exemptions available to homeowners so that it was no longer about age. However, these exemptions only apply to investment properties and not to your main residence. Over the years, capital gains tax law has evolved to make things easier for homeowners in every age group.
Capital gains tax for seniors: what you need to know
The majority of retired people generate income from retirement accounts and Social Security payments.
A retirement account is based on capital gains because you sell assets through your 401(k), IRA, or similar portfolio. It’s also common for seniors to sell their homes and downsize, to create a lump sum.
Navigating your finances as you approach retirement can be challenging, especially when you don’t know what is the right choice to make.
Getting good financial advice means making life-changing decisions about your money becomes easier. Why not find your best financial advisor and get a free first consultation below
To get started, let's take a look at some of the most common questions around capital gains exemption for seniors.
Is there a one-time capital gains exemption for seniors?
While there is no capital gain tax exemption for seniors, there are legal ways to avoid paying tax in certain situations. These apply to all age groups, not just those over 65.
One of these is when selling your home.
If you are selling your primary residence and your tax filing is single, you can avoid paying capital gains tax on the first $250,000 of your profits. If your tax filing is married and filing jointing, your threshold for avoiding capital gain rises to $500,000.
However, this exemption is only available every two years.
Is my retirement account exempt from capital gains tax?
The IRS encourages you to save for retirement by allowing tax deductions on certain retirement accounts. These tend to be front-end tax-advantaged, so you pay no tax on the money you invest. 401(k)s and traditional IRAs are the most common form of these accounts.
Then there are back-end tax-advantaged retirement accounts, which do create a kind of capital gains exemption for retirees. Here you put money in that you have already paid tax on, and when you withdraw money later in life, you pay no more tax on it. The best-known back-end retirement accounts are Roth IRAs. Here, you’ve already paid your taxes up front in the past, so now you’re tax-free.
Capital gains and retirement accounts: rules and facts at a glance
Here are some things to remember when it comes to your retirement account and capital gains tax:
With front-end retirement accounts, the IRS allows you to deduct money that you’ve invested from your income taxes, during the year in which you made the investment.
The most common forms are 401(k)s and IRAs.
With back-end retirement accounts, you invest money you have already paid tax. When you withdraw the money, you pay no tax.
Back-end retirement accounts, such as the Roth IRA, are a kind of capital gains tax relief strategy for retirees.
There are not any other age-related exemptions in the tax code currently.
Speak to an expert financial advisor
The IRS allows no specific tax exemptions for seniors – either on income or capital gains.
As discussed, a back-end tax-advantaged retirement account like the Roth IRA is really as close as you can get.
Taxation is a notoriously complex field, and your best bet is to talk to a professional financial advisor, who can give you detailed personal guidance on any deductions, credits, or exemptions you could exploit.
Let Unbiased connect you with an SEC-regulated financial advisor in as little as 48 hours.
FAQs
The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.
Does a 70 year old pay capital gains tax? ›
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the 'tax basis'.
How do you qualify for capital gains exemption? ›
When does capital gains tax not apply? If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive.
Who can use the lifetime capital gains exemption? ›
When you make a profit from selling a small business, a farm property or a fishing property, the lifetime capital gains exemption (LCGE) could spare you from paying taxes on all or part of the profit you've earned.
Do I have to buy another house to avoid capital gains? ›
You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.
At what age do you no longer pay capital gains? ›
For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
Do senior citizens get a tax break on capital gains? ›
Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
What is a simple trick for avoiding capital gains tax on real estate investments? ›
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
What is the 6 year rule for capital gains tax? ›
The capital gains tax property six-year rule allows you to treat your investment property as your main residence for tax purposes for up to six years while you are renting it out. This means you can rent it out for six years and still qualify for the main residence capital gains tax exemption when you sell it.
Do capital gains count as income? ›
Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate.
Assets Exempt from Capital Gains Tax
- cars.
- motorbikes.
- boats.
- yachts.
- racehorses.
- greyhounds.
- clocks.
- shotguns.
Put simply, a capital gain occurs when you sell an asset for more than what you originally paid for it. Almost any type of asset you own is a capital asset. This can include a type of investment (like a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat).
Do you have to claim all capital gains? ›
While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible.
How do I avoid capital gains when selling my house? ›
Yes. Home sales can be tax free as long as the condition of the sale meets certain criteria: The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify.
What are the two rules of the exclusion on capital gains for homeowners? ›
Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.
How can I avoid paying capital gains tax on the sale of a second home? ›
Ways to reduce your capital gains tax
- Adjust your profits to reflect any acquisition costs or property improvements. ...
- Depreciate the property if it was used as a rental. ...
- Rent out your second home. ...
- Make your second home your primary residence.
You may qualify for the 0% long-term capital gains rate for 2022 with taxable income of $41,675 or less for single filers and $83,350 or under for married couples filing jointly. You may be in the 0% tax bracket, even with six figures of joint income with a spouse, depending on taxable income.
Do capital gains stop at death? ›
If you inherit property or assets, as opposed to cash, you generally don't owe taxes until you sell those assets. These capital gains taxes are then calculated using what's known as a stepped-up cost basis. This means that you pay taxes only on appreciation that occurs after you inherit the property.
