Tips for Deferring Capital Gains Tax
In taxation, a capital gain results when you sell a non-inventory asset at an amount higher than its acquisition cost. If, however, you receive less than you paid for the asset, you will end up with a capital loss. It is mandatory to report capital gain to taxation authorities. Depending on the tax bracket applicable in your case, your liability could amount to large amounts, and that makes it wise to find ways to defer or avoid them. Let’s explore some of the useful strategies you can make use of to defer them.
Ensure you own the asset for at least one calendar year before selling it. A saving in capital gains tax will result because the tax rates that may be applied during its sale will usually be lower than they are today. Waiting to sell after a year will result in savings as high as 20 percent.
There is a legal loophole that allows persons who sell investment or rental property to avoid capital gains taxes. It applies when the proceeds from the sale of the said property are channeled back to the same type of investment within a specified period, which is usually 180 days. This exchange is usually complex, making it necessary to hire a taxation expert for the paperwork. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.
Channel the funds into a reputable retirement fund because such accounts are mostly tax-deferred or tax-exempt. Such a step will defer the payment of tax to a period when lower rates will be in operation. Note, however, that there are limits to the amounts that you can add to most retirement accounts, so use this strategy in conjunction with another one if the funds involved are substantial.
You can hand over a valuable asset to a charitable trust to sell on your behalf, deferring or avoiding the payment of capital gains tax. Charitable trusts are usually tax-exempt; and so, if they sell it for you, there will be no issue of capital gains tax to worry about. After the sale and for a particular number of years, the trust will pay a specific proportion of the asset’s cost to you. If there is anything left over, it is donated to charity.
If you have ambitions of educating your kids or grandchildren, it is possible to turn those dreams into ways of deferring your capital gains liability. Just deposit the funds into a college savings account and you are set. A health savings account can also aid in your efforts to defer the payment of deferred tax. This account is primarily meant to cater for medical costs that may arise in the future and are tax-exempt. For you to benefit from this exemption, the funds withdrawn must not be used for other purposes other than medical.
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