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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. Once a capital gain results, your tax authorities require you to report it. 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.

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. 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. 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.

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. Note, however, that there are limits to the amounts that you can add to most retirement accounts, so use this strategy in conjunction with another one if the funds involved are substantial.

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. 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. The trust will then transfer to you a specified portion of the asset’s cost over a certain precise period. 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. Just deposit the funds into a college savings account and you are set. 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.