Capital gains tax

Reduce Capital Gains from Sold Stocks with Cost Segregation

Cost Segregation may be the answer to capital gains on sold stocks

By: David Deshotels

In this unusual year of record swings in the stock market caused by a Covid economy, there have been record highs to steep declines back to record highs.  Taxpayers that sold stocks owned more than a year will be faced with paying capital gains taxes.

By utilizing cost segregation, owners of commercial buildings may reduce their capital gains tax rates or eliminate them completely.

First of all, it’s important to understand what is meant by capital gains – and capital losses.

A capital gain is your profit from selling an asset.  If you buy shares of stock for $2,000 and then sell them later for $3,000, you have realized a profit (or gain) of $1,000.

A capital loss is the opposite.  If the $2,000 investment goes down in value and you sell those same shares for a total of $1,500, you’ve realized a capital loss of $500.

What are the current capital gains tax rates?

Rate Single Joint Head of Household
0% Up to $39,375 Up to $78,750 Up to $52,750
15% $39,376 – $434,550 $78,751 – $488,850 $52,751 – $461,700
20% More than $434,550 More than $488,850 More than $461,700

 

In this Covid economy, numerous business owners sold stock during the market downturn.  Some taxpayers will be selling stocks to take advantage of the end-of-the-year rally. Many will be faced with having to pay capital gains taxes.

For taxpayers that own commercial property, there exists the opportunity to reduce or eliminate capital gains taxes by reducing their taxable income with paper losses generated by switching to a cost segregation depreciation method on their commercial properties.

For taxpayers with income above $488,850 (joint), the capital gains tax rate is 20%.  For taxpayers owning commercial property, a switch in depreciation method can be made to use accelerated depreciation to create paper losses to reduce taxable income. Paper losses from accelerated depreciation could potentially lower income below the $488,850 to lower that tax rate to 15%, which is a 25% savings. If the income can be lowered below $78,750, the tax rate is 0%.  Lowering taxable income from the 15% tax bracket to 0% is a huge saving that is non-taxable.

Commercial property owners that have or exploring the idea of selling a sizable amount of stock should consider the potential benefits of using cost segregation to lower their taxable income to save on capital gains taxes.

A cost segregation study on commercial buildings can create substantial accelerated depreciation deductions that can be used to lower a taxpayer’s taxable income.  The cost of performing a cost segregation study could potentially be insignificant in relation to the savings from lowering a taxpayer’s capital gains rates and payments.

Contact CSSI® to run a complimentary analysis to know what is possible in reducing capital gains payments.

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