The goal of many investors is to obtain capital gains tax deferment on investments. So here are tips for understanding capital gains tax deferment.
There are various strategies that can lead investors to capital gains tax deferment. Depending on the circumstance of an investment sale, complex tax rules exist. So here are some tips for understanding capital gains tax deferment and how to achieve it.
What Is Capital Gains Tax?
Capital gains tax consists of the profit investors make when selling an investment. It’s the tax owed upon a recently sold investment, as the income bracket adjusts annually. Capital gains taxes apply toward capital assets, such as cryptocurrencies, stocks, bonds, coin collections, real estate, jewelry and more.
Tips for Capital Gains Tax Deferment
Achieving capital gains tax deferment involves many methods that best suit the investor’s preferences. So let’s review various tips for understanding capital gains tax deferment and how investors can obtain it.
Sell During Low-Income Years
Many assume that capital gains taxes often become assessed separately from an individual investor’s regular income. However, the truth is that gains get lumped in with other income types that the investor earned during the year. Taxes become assessed to the total amount the investors have made.
However, investors can decrease their capital gains tax bill if they strategically time their sales to fall on a year of less income. It’s an overall lower taxable income amount due to gains that lower income amounts offset in different areas.
Sell Property After One Year
The one-year mark determines whether an investor pays short-term or long-term capital gains tax. There are considerable differences between them, as investors tend to wait a year before selling their property investment. Short-term capital gains become taxed as traditional income, so investors have significantly reduced tax rates, especially if they hold onto them for a year.
Invest in 1031 Exchanges
One tried-and-true method of capital gains tax deferment is a 1031 exchange. It allows investors to defer their capital gains tax entirely as long as they reinvest their sales into like-kind properties known as replacement properties. Investors must follow 1031 exchange rules to receive tax benefits, so working with qualified fiduciaries and intermediaries can ensure they’re doing everything correctly.
Investing in a 1031 exchange is a helpful way to obtain capital gains tax deferment. Numerous 1031 tax-deferred exchange advantages exist, such as consolidation and portfolio diversification. More specifically, it allows for exchange flexibility for investors, whether they have one or multiple properties. Also, it increases exposure to new markets and improves cash flow and passive income.