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5 Tricks 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. 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. 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. You can use it if, within 180 days of the sale of the mentioned property types, you channel the funds received into a similar investment. The complexities involved in this type of an exchange are best handled by a taxation expert, so hire one before proceeding. A notable advantage of using this method to defer capital gains tax is that almost everyone who uses it always succeeds.

Deposit the sale proceeds into a tax-deferred or tax-exempt retirement fund. The trick here is to defer the payment of tax to a later date when a lower tax bracket will be in use. 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. 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. By depositing the proceeds of an asset sale to a college savings account, no capital gains tax liability will arise. A health savings account can also aid in your efforts to defer the payment of deferred tax. Such an account is tax-exempt and is meant to cater to future medical expenses. For you to benefit from this exemption, the funds withdrawn must not be used for other purposes other than medical.