5 Tricks for 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. It is mandatory to report capital gain to taxation authorities. At times, capital gains taxes amount to large amounts, but you can defer or avoid them, which will limit your liability. 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. 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.
If you sell investment or rental property; there is a legal loophole in place that allows you to defer capital gains taxes without worries. 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. 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. Such a step will defer the payment of tax to a period when lower rates will be in operation. 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.
It is possible to defer or avoid the payment of capital gains tax on a highly-valuable asset by handing it over to a charitable trust so that this party can dispose of it for you. 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.
For someone with a dream of educating your child or grandchild, you can do so and still avoid paying capital gains tax at the same time. 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.
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