The Art of Mastering Taxes

Tips for Deferring Capital Gains Tax

If you sell a-non inventory asset such as land, building, and stocks and the amount you receive is higher than what you paid for it, this is called a capital gain in taxation terms. 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.

Ensure you own the asset for at least one calendar year before selling it. The purpose of this step is to pay capital gains taxes at reduced rates because the income tax bracket that will be used during the calculations will be much lower. Depending on your current tax rates, savings of up to 20 percent are possible.

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

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. 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. 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. For a specified number of years that will follow, you will receive a percentage of the total asset’s cost. 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. 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. 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.