Top Guidelines on 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. If, however, you receive less than you paid for the asset, you will end up with a capital loss. It is mandatory to report capital gain to taxation authorities. 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. Let’s explore some of the useful strategies you can make use of to defer them.
Make certain town an asset for a minimum of a calendar year before thinking of its disposal. Note that, one year from the date of your intended sale, the tax rates could be lower, and that will translate into savings. Waiting to sell after a year will result in savings as high as 20 percent.
If you sell investment or rental property; there is a legal loophole in place that allows you to defer capital gains taxes without worries. 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.
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 ensure that you defer tax to a later period when the applicable rates will be lower. 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.
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. 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. In case there is a leftover amount, it is channeled to charity work.
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. You just have to place the funds from the sale into a college savings account. It is also possible to get the same effect with a health savings account. Such an account is tax-exempt and is meant to cater to future medical expenses. However, withdrawals from this account must be for medical purposes only; otherwise, they will be taxed.