Tips for Deferring Capital Gains Tax
If you sell a-non inventory asset such as land, building, and stocks and the amount you receive is higher than what you paid for it, this is called a capital gain in taxation terms. If, however, you receive less than you paid for the asset, you will end up with a capital loss. Taxation authorities require you to report gains on the disposal of assets. 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.
Keep an asset in your name for at least one year before transferring it to someone else in a sale transaction. Note that, one year from the date of your intended sale, the tax rates could be lower, and that will translate into savings. Waiting to sell after a year will result in savings as high as 20 percent.
If you sell investment or rental property; there is a legal loophole in place that allows you to defer capital gains taxes without worries. You can use it if, within 180 days of the sale of the mentioned property types, you channel the funds received into a similar investment. The complexities involved in this type of an exchange are best handled by a taxation expert, so hire one before proceeding. Its main advantage is that it is always successful.
Since most retirement funds are tax-deferred or tax-exempt, deposit the proceeds of the asset’s sale to such an account. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. However, if the proceeds are substantial, it is advisable to use this trick in combination with another one because there are limits in place to govern the amounts that can be added to these accounts.
It is possible to defer or avoid the payment of capital gains tax on a highly-valuable asset by handing it over to a charitable trust so that this party can dispose of it for you. 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. All amounts that remain are utilized for charity purposes.
For someone with a dream of educating your child or grandchild, you can do so and still avoid paying capital gains tax at the same time. Just deposit the funds into a college savings account and you are set. It is also possible to get the same effect with a health savings account. It is a tax-exempt account that helps in catering for future medical costs. The exception, however, only applies if you withdraw the funds for medical and not other purposes.
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