Home Sale - Minimizing Capital Gains

[zero_house]

We just sold our home, which has appreciated about $775,000 over the seven years we've owned it. (We'll be moving to a lower-cost-of-living city.) After the $500,000 exemption for couples filing jointly, we'll still owe quite a bit in capital gains. I'm certainly not complaining, but are there any strategies for minimizing this? Here's what we have in mind:

-Deduct closing costs and real estate commissions.
-Deduct a few minor improvements we did over the years.
-Add back the amount we deducted for home office in past years.

We have flexibility in how much we need to work/earn in 2018 so we could reduce our ordinary income, but as I understand it, the capital gains tax rate is determined by your ordinary income plus capital gains, which this year will be very high.

Are we missing anything? Thanks for any insights.

[MustacheAndaHalf]

Picture a person as your income - the hat they wear is your capital gains, which gets a tax bracket sitting on top of your income.  So when your income goes up, that can push your long-term capital gains into a higher tax bracket.  As of last year long-term capital gains changed from a 15% tax rate to 20% tax rate at $418k, but the new tax laws may have altered that.

If you earn $150k, with $275k of long-term capital gains, you are mostly paying the 15% tax rate.  But something slightly odd happens if you earn one more dollar: your tax rate would normally be 24%, but that additional dollar also pushes another $1 of capital gains from 15% to 20%.  So you're actually paying 29% tax on both that $1 earned and the tax side effects.

But at the end of the day, do you really want to forgo money to pay the IRS less?

[zero_house]

Thanks @MustacheAndaHalf. That's a really helpful analogy. Until this point, I haven't had any significant capital gains, so it's all new to me. It sounds like all we can do to minimize this tax is to avoid the $418k threshold, which I don't think we'll pass in 2018.

[Rocketman]

If you give to charities- think about a DAF (Doner advisory fund) and pool your next few years into one deduction. Make sure you will be able to itemize. Also make sure your state taxes are paid this year.

If you have any losses in your investments - lock those in - because they will offset.

Talk to your tax advisor.

Good luck - remember this is a good problem to have.

[MustacheAndaHalf]

You will want to check that the limit is still $415k or so - unchanged by the recent tax law changes.

A donor advised fund could be a good idea, but it's your capital gains that are really high this year rather than your income.  I'd wait for a high income year to setup the donor advised fund.  Schwab and Fidelity support them for $5,000 minimums, and if you really want to optimize you can donate actual mutual fund shares (like VTSAX) without selling them.