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. Once a capital gain results, your tax authorities require you to report it. 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.
Make certain town an asset for a minimum of a calendar year before thinking of its disposal. The purpose of this step is to pay capital gains taxes at reduced rates because the income tax bracket that will be used during the calculations will be much lower. Depending on your current tax rates, savings of up to 20 percent are possible.
There is a legal loophole that allows persons who sell investment or rental property to avoid capital gains taxes. 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. It is a complex exchange that may require you to find a tax expert to handle. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.
Deposit the sale proceeds into a tax-deferred or tax-exempt retirement fund. 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.
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. For a specified number of years that will follow, you will receive a percentage of the total asset’s cost. In case there is a leftover amount, it is channeled to charity work.
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. By depositing the proceeds of an asset sale to a college savings account, no capital gains tax liability will arise. You can also get similar effects if you have a health savings account that you will deposit the funds to. This account is primarily meant to cater for medical costs that may arise in the future and are tax-exempt. However, withdrawals from this account must be for medical purposes only; otherwise, they will be taxed.