A Simple Plan: Taxes

5 Tricks for 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. 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. Waiting to sell after a year will result in savings as high as 20 percent.

If you sell investment or rental property; there is a legal loophole in place that allows you to defer capital gains taxes without worries. 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. The complexities involved in this type of an exchange are best handled by a taxation expert, so hire one before proceeding. The good thing is that it works for almost anyone who uses it to defer capital gains tax.

Channel the funds into a reputable retirement fund because such accounts are mostly tax-deferred or tax-exempt. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. 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. 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. The trust will then transfer to you a specified portion of the asset’s cost over a certain precise period. 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. 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. This account is primarily meant to cater for medical costs that may arise in the future and are tax-exempt. The exception, however, only applies if you withdraw the funds for medical and not other purposes.