By Stephen W. Bedikian, AIF®, Associate Wealth Advisor
What are capital gains taxes?
You’ve made a successful investment with a nice healthy gain and now you’re ready to sell and take a victory lap. But wait! Uncle Sam wants to share in your success, so you get to pay the IRS capital gains tax.
Over the past 20 years, both the real estate and stock markets have appreciated enormously, and many investors are sitting on large unrealized capital gains. Those gains may be stocks, real estate investment properties, the business you own or a personal real estate holding—including your primary residence.
Remember when you thought the federal personal residence exclusion on capital gains—$500,000 for married filing jointly and $250,000 for single filers—was way more than you’d ever need?
There have been some long-time homeowners in high-cost states that have seen the value of their homes appreciate well into seven-figure territory. In California, more than 28% of home sellers had capital gains exceeding the personal exclusion limit in 2023 and had to pay taxes on their real estate capital gains (Cotality).
Current capital gains tax rates in 2025
The federal capital gains tax rate is determined by the holding period of the investment and your total taxable income in the year you sell the asset. Investments held one year or less are treated as short-term capital gains and you will pay ordinary income tax rates, which top out at 37%[1]*. For investments held more than one-year, long-term capital gains tax rates are 0% for single-filers if your taxable income is $48,350 or less ($96,700 married filing jointly); 15% if your taxable income is between $48,351 and $533,400 ($96,701-$600,050 married filing jointly); and 20% if it’s over that amount.
The federal government is $36 trillion dollars in debt and that amount is climbing rapidly. Some people are wondering if President Trump is planning to get rid of the capital gains tax. That $36 trillion makes it highly unlikely! Over the long term, tax rates may potentially rise from current levels. Back in the 1970s, the maximum capital gains tax rate was 35%!
State-level capital gains tax rates vary widely. According to the Tax Foundation, 32 states (including California) and the District of Columbia tax capital gains simply by subjecting them to the same rate schedule that applies to ordinary income. One outlier, Washington, imposes a 7% tax on capital gains income exceeding $250,000. Meanwhile, seven states (including Florida, Texas and Nevada) avoid this dilemma by forgoing an individual income tax altogether.
Only eight states (including Arizona), like the federal government, apply lower effective individual tax rates to long-term gains than to ordinary income, either by applying lower statutory rates or by offering an exclusion for a portion of otherwise taxable capital gains.
Capital gains tax reduction strategies
A number of strategies have historically been used to address capital gains tax liability:
- It’s not actually a strategy — but when you die, your taxable assets are ‘stepped up’ in basis reducing, and possibly eliminating, a capital gains tax liability (although not on assets held in retirement accounts; these are taxed as ordinary income when distributed). This is how your heirs could avoid paying capital gains on their inheritance. The step up is great for them but you may not want to own the appreciated asset until your death.
- Tax Loss Harvesting. Investment positions that are showing a loss during the year can be sold to realize a taxable loss in the year of the expected gain. Losses and gains “offset” to reduce or eliminate the tax liability. A sold investment can be bought back after 31 days to avoid the IRS’ wash rule.
- Tax-Deferred Exchanges. The most well-known type of tax-deferred exchange is the Section 1031 exchange that allows the seller of a real estate property to roll a capital gain into a like-kind property purchased within 180 days. The gain is deferred but not reduced. There is also a Section 1035 exchange used for gains associated with life insurance and annuities, and a Section 351 exchange that allows an investor to exchange appreciated securities for ownership in a diversified ETF subject to specific rules. The stock holdings are thereby diversified, and the capital gain deferred until the exchanged ETF shares are sold.
Seeking to minimize capital gains taxes through direct indexing
Another strategy that’s seeing increased application is direct indexing, which uses the volatility of individual stocks to help scale up the concept of tax loss harvesting. In a direct indexing strategy, a separately managed account is created, which might hold all 500 stocks in the S&P 500. Throughout the year, individual stocks are bought and sold to deliberately generate taxable capital losses while aiming to achieve a return similar to an identified index like the S&P 500.
The investor may potentially have their cake and eat it too by aiming for the index return—subject to some limited tracking error—while seeking to realize capital losses that can be used to eventually help offset capital gains. Assets allocated to passive indexing have grown dramatically over the past couple of decades. Direct indexing has higher annual fees than passive indexing because of the active trading involved, but it is designed to have capital gains realized by the strategy offset by the taxable losses generated.
Halbert Hargrove has partnered with AQR Capital Management to offer enhanced direct indexing strategies. AQR’s use of leverage to magnify both long and offsetting short positions can help increase the realized tax losses of a portfolio. These tax losses can be carried forward and can be applied to future capital gains; in addition, they may also be applied against capital gains not just in a client portfolio, but also capital gains associated with the sale of a business, a primary residence or other real estate.
Effectively managing capital gains taxes requires big-picture strategizing
A pertinent old Wall Street adage is: It’s not what you make but what you keep that counts. If you have a highly appreciated portfolio or real estate or are planning to sell a business, contact your HH advisor to discuss opportunities to help manage your future tax liability.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.
[1]* Add 3.8% for the Net Investment Income Tax if you had income of over $200,000 as a single filer and $250,000 for married couples filing jointly.
