But what about retirement accounts and Social Security income? Are there still tax advantages to be had for seniors?
Capital gains 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
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'.
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 the capital gains tax for retirees? ›
Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
How does the one time capital gains exemption work? ›
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years. But it can, in effect, render the capital gains tax moot.
What are the two rules of 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 to avoid capital gains tax over 65? ›
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.
Is there a once-in-a lifetime capital gains exemption? ›
The capital gains exclusion applies to your principal residence, and while you may only have one of those at a time, you may have more than one during your lifetime. There is no longer a one-time exemption—that was the old rule, but it changed in 1997.
Do people over 70 pay capital gains? ›
Capital Gains Tax for People Over 65. 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.
Is there a way to avoid capital gains tax on the selling of a house? ›
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.
Does capital gains tax go to Social Security? ›
The benefits are funded by payroll taxes collected from current workers and their employers. It's important to note that while capital gains can increase one's adjusted gross income (AGI), they are not subject to Social Security taxes.
This means that if you sell your home for a gain of less than $250,000 (or $500,000 if married, filing jointly), you will not be obligated to pay capital gains tax on that amount. However, there are certain criteria you must meet to qualify for the home sale exclusion.
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.
How to qualify for capital gains exemption? ›
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. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
Do I have to buy another house to avoid capital gains? ›
How Long Do I Have to Buy Another House to Avoid Capital Gains? You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
How long do I have to buy another house to avoid capital gains? ›
Thankfully, you can defer capital gains tax should you purchase another rental property within 180 days of the original investment property sale. There are also a variety of other options to lower your tax liabilities or avoid paying capital gains tax on your rental properties altogether.
What lowers capital gains tax? ›
Long-term investing offers a significant advantage in minimizing capital gains taxes due to the favorable tax treatment for investments for longer durations. When investors hold assets for more than a year before selling, they qualify for long-term capital gains tax rates, typically lower than short-term rates.
How can senior citizens avoid taxes? ›
Seniors can earn more income than younger workers before submitting a tax return. People age 65 and older can earn a gross income of up to $15,700 before they are required to file a 2023 tax return, which is $1,850 more than younger workers.
How long do you have to reinvest to avoid capital gains tax? ›
Frequently Asked Questions about Capital Gains Tax
As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes. You might have to place your funds in an escrow account to qualify.
