5 Tricks for Deferring Capital Gains Tax
In taxation, a capital gain results when you sell a non-inventory asset at an amount higher than its acquisition cost. 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. 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. 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. 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. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.
Channel the funds into a reputable retirement fund because such accounts are mostly tax-deferred or tax-exempt. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. It is advisable to use this method in conjunction with another one if the proceeds are considerable because you could be prevented from depositing everything into this type of account by certain limiting rules.
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. 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. If there is anything left over, it is donated to charity.
If you have ambitions of educating your kids or grandchildren, it is possible to turn those dreams into ways of deferring your capital gains liability. 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. 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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