5 Tricks 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. A capital loss results if the cost of the same item is higher than the proceeds received from its sale. 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. Here are top 5 tricks for deferring capital gains tax effectively.
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.
There is a legal loophole that allows persons who sell investment or rental property to avoid capital gains taxes. 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. The complexities involved in this type of an exchange are best handled by a taxation expert, so hire one before proceeding. 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. 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.
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. Legally, charitable trusts do not pay taxes, and that means that you will too not be liable to capital gains tax if they sell it on your behalf. For a specified number of years that will follow, you will receive a percentage of the total asset’s cost. All amounts that remain are utilized for charity purposes.
You can defer the payment of capital gains tax if you have the ambition of educating your kids or grandkids. You just have to place the funds from the sale into a college savings account. 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.
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