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. On the other hand, if the sale proceeds are lower than the asset’s purchase price, a capital loss results. It is mandatory to report capital gain to taxation authorities. At times, capital gains taxes amount to large amounts, but you can defer or avoid them, which will limit your liability. The following guidelines will help you defer capital gains on the sale of your non-inventory assets.
Ensure you own the asset for at least one calendar year before selling it. 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. It is a complex exchange that may require you to find a tax expert to handle. 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 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. Note that charitable trusts are exempt from taxation, a benefit that you will reap from this kind of a transaction. The trust will then transfer to you a specified portion of the asset’s cost over a certain precise period. 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. 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.