Avoiding Capital Gains Tax

Investors agree that avoiding capital gains tax is important, for taxes can have a significant impact upon the profits realized from investments. However, with planning and discipline, a person can deflect some of the effects from capital gains taxes. Although changes in capital gains tax rates are ongoing, there is usually enough time before changes actually take place to ensure that these do not seriously alter investment plans. Committing oneself to a general investment plan while remaining flexible enough to deal with new regulations takes a certain amount of discipline and a determination to remain informed about financial matters. Yet this mixture of disciplined planning and flexibility allows an investor to realize maximum profits from investment vehicles.

Capital gains are taxed differently depending upon whether an investment is long or short term. A short term investment is one in which the asset is held for one year or less. These short term investments are taxed at the same rates as ordinary income tax rates. Long term investments are those in which the assets are held for a period greater than one year. These are taxed at a discounted rate -- normally 5% or 15%, depending upon the investor's tax bracket. If investments are held until they qualify for these discounted rates, it will allow the investor to reap greater earnings while avoiding capital gains tax when the investment is sold.

Which rates a person will pay depends upon several things. These include when a person buys and sells an asset, the income level of the investor, and the latest IRS code changes! For this reason, a person should consult with investment advisors or experts in these laws before taking any actions regarding his or her investments. However, it is possible to stay informed about many of these laws regarding capital gains tax rates through financial websites and articles. Check to make sure that the information uncovered is up to date and accurate before altering an investment strategy.

Currently, capital gains tax rates are 5%, 15%, 25%, or 28% for long term investments. An individual's income determines which of the capital gains tax rates apply to the investment. Long term capital gains tax rates are usually much lower than regular income tax rates. Collectibles (stamps, coins, precious metals or gems, rare rugs and antiques, and fine art) are taxed at a flat rate of 28%. Some business assets which are used in a business venture are considered investments. These may include equipment used in the business, such as copiers and computers, or items such as desks, chairs, and other office furniture.

Before 1997, the only way to be sure of avoiding capital gains tax on the sale of a home was to use the money to buy another more expensive house within two years. Sellers who were age 55 or older could take a one-time exemption of up to $125,000 on profits realized from selling their homes. These rollover or one-time options were replaced with new exclusion amounts by the Taxpayer Relief Act of 1997. Now, a person does not have to buy another house with the proceeds from selling a house. There is no limit on the number of times this home sale exemption can be used. Each time, the seller can realize up to $250,000 in profits if he or she is single, or $500,000 for married couples. The property has to be a principle residence, and a person has to live in it for two out of the five years before the sale. Note that the two years does not have to be consecutive. Any combination of renting out and living in the property is acceptable, as long as the owner lives there for two out of the five years previous to the sale. The new rules also eliminate paperwork. If a person's profits do not exceed the limits, nothing need be filed with the IRS. Some pro-rated tax free profits are allowed under certain circumstances due to changes in health, employment and unforeseen circumstances. Military personnel get special exemptions from the use requirement if they must move to fulfill service commitments, for the frequent deployments common to their employment make it difficult to meet residency rules.

Investment properties have their own set of rules for avoiding capital gains taxes. The sale of one investment property for another, sometimes called a 1031 Exchange (named for the section of the IRS code which permits this action), Starker Trust Exchange, or 'like kind' exchange, helps investors to avoid capital gains penalties. An investor must select a replacement property within 45 days of the sale of the investment property. Also, one must close on the purchase of the second investment property no later than 100 days following the closing on the first property. A 'qualified intermediary' will hold the money and act as the seller of the first property and the buyer of the second one. The second property must have at least equal value as the one which was sold. Also, the second property must be used as an investment property with at least some evidence of rental activity for two years. In this way, a person can defer the capital gains tax from the sale of the first property. After the two years are up, the owner can declare the property his or her primary residence and live in it for at least two more years. At that point, if it is sold it will qualify for the $250,000 or $500,000 exclusion from capital gains taxes.

Be sure to consult an attorney or tax advisor before beginning this process, to make sure the latest terms are agreeable and that all the current requirements are met. "Render therefore to all their dues: tribute to whom tribute is due, custom to whom custom..." says Paul in Romans 13:7. Christians have the duty to pay any taxes which are due. However, if there is a legal way of avoiding capital gains tax, this is a wise way to preserve funds which can then be used for other purposes.

Add to: File Insurance Business article Teen Photo Images