Tom’s Advice for Paying the Price to Earn Money
Transcript:
Katie Nealis:
Do you have any good tips to avoid capital gains taxes from investments, inheritances, etc.?
Tom Vaughan:
So first of all, from an inheritance standpoint, under current law, you get a stepped up basis. And this is something to really understand because I’ve seen people make some mistakes here. What that means is that if you inherit a house from your parents, they paid 100,000, and it’s worth a million, right? Normally, there would be a big capital gain on that. But what happens is, they allow you to step up the basis from that 100,000, I’m being very simple here, there’s a whole bunch of things that go on, but to do from that 100,000, right to the value at the date of death. So you go out and get a appraisal, and they say, it’s worth a million, then that is now your cost basis, if you sell it, there’s no capital gain. And so that actually relates, again, to parents situation, whether in nursing home or something, and you need the money.
I’ve seen people sell their parents homes, pay this monsters capital gain. And, you know, maybe a better idea would have been to try to rent that home to pay for, if possible, and pay for the nursing home or partial part of the nursing home. And then if the parent does pass away, you get that step up basis. So you get rid of the capital gain on inheritance. And that happens with stocks that happens with really anything that is appreciated, you can reevaluate it even collectibles, and set the price at current price. And then you know, if you end up selling it, you know, pretty soon after that, you might not have any gain at all. Normal scenarios where it’s not an inheritance, where you’re just trying to avoid capital gains, those are much more difficult. There’s some esoteric concepts out there, I don’t subscribe to I basically look at it as Hey, there’s, you know, a price to pay for making money. You know, that’s kind of a, it’s not a bad thing, they don’t take all of it. And I’ve actually seen people actually try to reduce their gain to try to reduce their tax. But if they take 25%, and you reduce your gain by, you know, 100,000 try to make less, you actually just lost 75,000. net, it just make as much money as you can, and give part of it, the government, but I will say one strategy that we use all the time, I buy, you know, with pieces, these ETFs for these portfolios all the time, they don’t always work, right. And so, I will take that loss, whenever I can, I try to take a loss, I take a loss, take a loss, you know, overall, I want to hold on to my winners and sell my losers. And when I’m taking those losses, I’m accumulating this right off. And then when I take gains I can use that accumulated right off against those gains.
So if I end up taking $10,000, or the loss of during the year, I could take $10,000 worth of gains, you know, say at the end of the year, I’m not taxed. The last piece would just be hold on to things for a year, right? Because the capital gains tax is much lower. If you look at the long term gain tax is better if you hold on to something for a year, versus if you sell it before that if you have a loss and three months or something, Okay, great, take it, move on to something else, you know, capture losses. But if you haven’t gained in three months, if you sell that you don’t want to hold on to something for a year, just for tax purposes and watch your game disappear. So if you really need to take it to pay the tax, I have seen more people lose money in the investment world trying to avoid tax. It’s amazing. All of these things, these limited partnerships, all these things have come out. And people are trying to avoid tax. And it’s like this huge issue. It’s amazing to me Actually, it just boggles my mind. They don’t take it all keep keep that in mind.
Easan Arulanantham:
Yeah, IRS is always playing whack a mole with those loopholes and trying to just get rid of them slowly.
Tom Vaughan:
Oh, definitely. We’re running, you know, massive deficits. And so they’re always looking at different things to try to, you know, get more tax revenue in as a whole. So yeah, there’s, there’s, you know, that’s something to keep up on as to how they’re doing it. There’s been some talk about increasing capital gains for above a million dollars, there’s been some talk about reducing or eliminating the step up that I just talked about also. So these are things to keep in mind and keep in front of, they could be fairly costly mistakes. So it’s worth spending some time on that. And, and again, that’s why tax planning is such a critical issue. It’s why we incorporate it as one of our four pillars of success for building wealth. It’s why we have a tax planning, you know, playlist on on our you know, channel, it’s why we’re creating these resources because it’s I believe tax is a big issue that you can really try to learn about and try to get better at because, you know, you’re paying more or worse, losing more because you’re trying to avoid taxes.