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. It is mandatory to report capital gain to taxation authorities. These taxes are sometimes high, making it necessary to find ways to find ways to keep the amounts minimal or avoid them altogether. The following guidelines will help you defer capital gains on the sale of your non-inventory assets.
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. 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. This exchange is usually complex, making it necessary to hire a taxation expert for the paperwork. Its main advantage is that it is always successful.
Deposit the sale proceeds into a tax-deferred or tax-exempt retirement fund. Such a step will ensure that you defer tax to a later period when the applicable rates will be lower. 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.
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. 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.
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. Just deposit the funds into a college savings account and you are set. You can also get similar effects if you have a health savings account that you will deposit the funds to. Such an account is tax-exempt and is meant to cater to future medical expenses. For you to benefit from this exemption, the funds withdrawn must not be used for other purposes other than medical.