Top Guidelines on 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. On the other hand, if the sale proceeds are lower than the asset’s purchase price, a capital loss results. 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. 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. 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. 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. This exchange is usually complex, making it necessary to hire a taxation expert for the paperwork. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.
Since most retirement funds are tax-deferred or tax-exempt, deposit the proceeds of the asset’s sale to such an account. 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.
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. Note that charitable trusts are exempt from taxation, a benefit that you will reap from this kind of a transaction. After the sale and for a particular number of years, the trust will pay a specific proportion of the asset’s cost to you. 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. 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. For you to benefit from this exemption, the funds withdrawn must not be used for other purposes other than medical.
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