On Returns: My Rationale Explained

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. Taxation authorities require you to report gains on the disposal of assets. These taxes are sometimes high, making it necessary to find ways to find ways to keep the amounts minimal or avoid them altogether. Let’s explore some of the useful strategies you can make use of to defer them.

Ensure you own the asset for at least one calendar year before selling it. 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. It is possible to save at least 20 percent of the amount you are likely to pay today with this strategy.

There is a legal loophole that allows persons who sell investment or rental property to avoid capital gains taxes. 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. 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.

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. 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. All amounts that remain are utilized for charity purposes.

You can defer the payment of capital gains tax if you have the ambition of educating your kids or grandkids. You just have to place the funds from the sale into a college savings account. 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. However, withdrawals from this account must be for medical purposes only; otherwise, they will be taxed.