Capital gains tax exemption for seniors: what does it mean for you?

3 mins readLast updated May 12, 2023by Rachel Carey

Since the tax break for those over 55 on selling property was dropped in 1997, it looks like there’s no exemption for seniors. Maybe it’s time to fine-tune your investment strategy.

Capital gains are the profits you make by selling an investment asset – the difference between the price you originally paid and any increase that has accrued at the point of sale. But what about retirement accounts and Social Security income? Are there still tax advantages to be had for seniors?

Does your age affect capital gains taxes?

Right now, the law doesn’t allow for any exemptions from capital gains tax based on your age.

Whether you’re 65 or 95, seniors – irrespective of age – must pay capital gains tax where it’s due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the ‘tax basis’.

The Taxpayer Relief Act of 1997 increased the range of capital gains exemptions available to homeowners, so that it was no longer about age. However, these exemptions only apply to investment properties and not to your main residence. Over the years, capital gains tax law has evolved to make things easier for homeowners in every age group.

Capital gains tax for seniors: What you need to know

The majority of retired people generate income from retirement accounts and Social Security payments. A retirement account is based on capital gains, because you sell assets through your 401(k), IRA, or similar portfolio. It’s also common for seniors to sell their homes and downsize, to create a lump sum.

So, what do each of these options mean?

Is my retirement account exempt from capital gains tax?

The IRS encourages you to save for retirement by allowing tax deductions on certain retirement accounts. These tend to be front-end tax-advantaged, so you pay no tax on the money you invest. 401(k)s and IRAs are the most common form of these accounts.

Then there are back-end tax-advantaged retirement accounts, which do create a kind of capital gains exemption for retirees. Here you put money in that you have already paid tax on, and when you withdraw money later in life, you pay no more tax on it. The best-known back-end retirement accounts are Roth IRAs. Here, you’ve already paid your taxes up front in the past, so now you’re tax-free.

Capital gains and retirement accounts: Rules and facts at a glance

  • With front-end retirement accounts, the IRS allows you to deduct money that you’ve invested from your income taxes, during the year in which you made the investment.

  • The most common forms are 401(k)s and IRAs.

  • With back-end retirement accounts, you invest money you have already paid tax. When you withdraw the money, you pay no tax.

  • Back-end retirement accounts, such as the Roth IRA, are a kind of capital gains tax relief strategy for retirees.

  • There are not any other age-related exemptions in the tax code currently.

Your main takeaway

The IRS allows no specific tax exemptions for seniors – either on income or capital gains. As we’ve discussed, a back-end tax-advantaged retirement account like the Roth IRA is really as close as you can get.

Taxation is a notoriously complex field, and your best bet is to talk to a professional financial advisor, who can give you detailed personal guidance on any deductions, credits, or exemptions you could exploit.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.