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. 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. 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. A saving in capital gains tax will result because the tax rates that may be applied during its sale will usually be lower than they are today. Depending on your current tax rates, savings of up to 20 percent are possible.
A person who sells investment or rental property can defer capital gains taxes by using a legal loophole in the tax laws. 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. Its main advantage is that it is always successful.
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. 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. 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. 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.
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. For you to benefit from this exemption, the funds withdrawn must not be used for other purposes other than medical.
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