Tips for Deferring Capital Gains Tax
A capital gain is a term used in taxation to refer to profit from the sale of a non-inventory item. 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. At times, capital gains taxes amount to large amounts, but you can defer or avoid them, which will limit your liability. Here are top 5 tricks for deferring capital gains tax effectively.
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. Depending on your current tax rates, savings of up to 20 percent are possible.
A person who sells investment or rental property can defer capital gains taxes by using a legal loophole in the tax laws. To qualify, you have to channel the funds received from such a sale to the same type of investment, something you must do within 180 days of the transaction. It is a complex exchange that may require you to find a tax expert to handle. Its main advantage is that it is always successful.
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.
If you own a high-value asset, you can defer the payment of capital gains tax by handing it to a charitable trust so that they can sell it on your behalf. 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. 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. By depositing the proceeds of an asset sale to a college savings account, no capital gains tax liability will arise. It is also possible to get the same effect with a health savings account. This account is primarily meant to cater for medical costs that may arise in the future and are tax-exempt. The exception, however, only applies if you withdraw the funds for medical and not other purposes.
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