In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on “long-term capital gains,” which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. In 2011 these reduced tax rates will “sunset,” or revert to the rates in effect before 2003, which were generally 20%. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate.
CATD will help you generate cash and defer capital gains tax.
Deferring and/or Reducing Capital Gains Tax
Capital gains tax can be deferred or reduced if a seller utilizes the proper sales method and/or deferral technique. There are many sales techniques and methods out there, each of which have their benefits and drawbacks. See some ways to defer and/or reduce capital gains tax below.
- Deferred Sales Trust– Allows the seller of property to defer capital gains tax due at the time of sale over a period of time.
- 1031 exchange – Defer tax by exchanging for “like kind” property. Pay capital gains when it is realized.
- Structured sale annuity (aka Ensured Installment Sale) – Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income.
- Charitable trust – Defer and reduce capital gains by giving equity to a charity.
- Installment Sales – Defer capital gains by taking payments from a buyer over a period of years. No protection from buyer default.
- Self Directed Installment Sale (SDIS) – Allows for the deferral of capital gains taxes while removing the risks from buyer default under a traditional installment sale.-
- Private annuity trust – No longer a valid tax deferral tool.
What is a Capital Investment?
Capital gains are profits you earn through buying and selling capital assets. Capital assets include things such as stocks, mutual funds, bonds, real estate, precious metals, coins, fine art, and other collectibles. Wages, interest, and dividends are considered ordinary income, not capital gains income.
No Capital Gains on Tax-Deferred Investments
Many people invest in stocks, bonds, and mutual funds through a tax-deferred retirement account. Individual Retirement Accounts (IRA), Roth IRA, and 401(k) plans are examples of tax-deferred accounts. Your investment profits in tax-deferred accounts are not reported as capital gains. Instead, income from these accounts is tax-deferred until the money is withdrawn, and then the income is taxed as ordinary income. (Withdrawals from a Roth IRA may be tax-free if you meet certain requirements.)
Avoiding Capital Gains Tax
Click here to ask us about 1031 exchange and other methods to on how to avoid Capital Gains Tax.