5 Tricks 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. 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. These taxes are sometimes high, making it necessary to find ways to find ways to keep the amounts minimal or avoid them altogether. The following guidelines will help you defer capital gains on the sale of your non-inventory assets.
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.
There is a legal loophole that allows persons who sell investment or rental property to avoid capital gains taxes. It applies when the proceeds from the sale of the said property are channeled back to the same type of investment within a specified period, which is usually 180 days. The complexities involved in this type of an exchange are best handled by a taxation expert, so hire one before proceeding. The good thing is that it works for almost anyone who uses it to defer capital gains tax.
Channel the funds into a reputable retirement fund because such accounts are mostly tax-deferred or tax-exempt. Such a step will ensure that you defer tax to a later period when the applicable rates will be lower. 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. 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.
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. 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.