A capital gain is a sum of money gained from selling a capital, non-inventory asset such as real estate properties, vehicles, stocks, bonds, and precious metals. On the downside, those profits you made on the sale aren't shielded from tax. In addition to paying income and payroll taxes, you are also mandated by the law to pay capital gains tax (CGT) if you buy and sell investment assets.

Two Types of Capital Gains Tax Rates

Capital gains aren't treated equally. The tax rates for capital gains can vary between short-term and long-term gains.

• Short-term

  Short-term capital gains do not benefit from special tax rates. They are taxed at ordinary rates, and same as your wage, interest, and freelancing income taxes. In the US, they range from 10 percent to 39.6 percent, depending on your total taxable income.

• Long-term

  Long-term capital gains, on the other hand, are taxed at cheaper, more favorable rates. They range from 0 to 20 percent. Capital gains are considered to be long-term if the property owner obtains the asset for at least a year. If you can manage to hold your assets for a year or longer, then you can benefit from a lower tax rate on your profits.

7 Strategies To Reduce Or Avoid Capital Gains Tax

Now, let's talk about that one massive investment asset by which capital gains tax is imposed – real estate.

If you sell your home, piece of land, or rental property at a gain, you'll pay a capital gains tax on some of the proceeds. The good thing is you can reduce or completely avoid tax by exploring possible strategies, including the following seven techniques.

1. Wait for at least a year before selling

The saying, “the best things come to those who wait” also holds true for taxpayers. If you're thinking of putting your home on sale, keep in mind that you have the option to hold onto them until a later date.

The advantage of this is capitals gains qualify for long-term status (and a lower tax rate) when you hold the asset for at least a year before selling it. You could save 10% to 20% depending on your tax rate. Being able to get a better price for the assets in the future is another possibility.

2. Sell when your income is low

The premise is similar to paying taxes on wages and salary income – earners in higher tax brackets pay more than the ones in lower brackets. If your income level is about to decline, let's say your spouse is about to quit his/her job or one is about to retire, sell your property during this low-income year to reduce your capital gains tax rate.

3. Reduce your taxable income

The rate of your CGT is linked to your taxable income. If you want to reduce that rate, general tax savings strategies could help. Before filing your tax return, make every effort to maximize your tax deductions and credits. You may defer income tax by making charitable contributions, topping off your retirement savings plan, and putting money in a health savings account.

4. Use capital losses to reduce capital gains

If your investment property ends up losing money rather than generating income, you can use those losses to lower your CGTs. This works by using up your capital losses in the years that you have capital gains to determine the “net” capital gain or loss.

5. Invest in home improvements

Adding rooms, working on landscaping, upgrading windows and doors, restoring damaged parts, and replacing the flooring all count as improvements. In addition to increasing the value of your property, any improvements made increase your basis in your home and therefore reduce your capital gain. This tax savings technique works best of course if you have a gain. Keep thorough records of the works and purchases you've made.

6. Limit the rental use of your home

One rule around capital gains and home sales is the exclusion; if you're selling a property that has been your primary residence, then you can take full advantage of the gain exclusion. Personal use assets including cars and furniture are also exempt from CGT.

If you choose to rent out your home instead of selling it, then you might lose the exclusion benefit. To qualify for the exclusion, generally, you must have lived in the home for at least two years of the five years prior to the home sale. In other words, the exclusion starts to phase out once you start to lease your house for three years.

7. Keep records of selling expenses

Capital gains tax is reduced by any costs incurred to sell the home, and you should report these costs if you've exceeded your exclusion or the property doesn't qualify for such. Some expenses that can lower your CGT are settlement fees, closing costs, broker commissions, title search fees, advertising fees, appraisal fees, transfer taxes, and other miscellaneous document preparation fees paid for.

Author Bio: Sophie Harris is a resident writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.