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. Once a capital gain results, your tax authorities require you to report it. At times, capital gains taxes amount to large amounts, but you can defer or avoid them, which will limit your liability. 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. 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. 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.
Since most retirement funds are tax-deferred or tax-exempt, deposit the proceeds of the asset’s sale to such an account. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. 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. After the sale and for a particular number of years, the trust will pay a specific proportion of the asset’s cost to you. If there is anything left over, it is donated to charity.
You can defer the payment of capital gains tax if you have the ambition of educating your kids or grandkids. By depositing the proceeds of an asset sale to a college savings account, no capital gains tax liability will arise. A health savings account can also aid in your efforts to defer the payment of deferred tax. 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.