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. A capital loss results if the cost of the same item is higher than the proceeds received from its sale. 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. 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. It is possible to save at least 20 percent of the amount you are likely to pay today with this strategy.
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. 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.
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. The trust will then transfer to you a specified portion of the asset’s cost over a certain precise period. In case there is a leftover amount, it is channeled to charity work.
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. 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. It is a tax-exempt account that helps in catering for future medical costs. However, withdrawals from this account must be for medical purposes only; otherwise, they will be taxed.