Top Guidelines on 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. 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. Note that, one year from the date of your intended sale, the tax rates could be lower, and that will translate into savings. 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. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.
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 defer the payment of tax to a period when lower rates will be in operation. 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. Note that charitable trusts are exempt from taxation, a benefit that you will reap from this kind of a transaction. For a specified number of years that will follow, you will receive a percentage of the total asset’s cost. 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. You can also get similar effects if you have a health savings account that you will deposit the funds to. This account is primarily meant to cater for medical costs that may arise in the future and are tax-exempt. However, withdrawals from this account must be for medical purposes only; otherwise, they will be taxed.