Avoid Capital Gains Tax – Pay Less, Earn More!

How To Pay Less!

August 11, 2004
By Niles Brohey

Capital gains taxes are levied on profits resulting from the sale or exchange of capital assets. Capital assets encompass many everyday items such as real estate and shares but can also include less tangible things like goodwill. The rate at which capital gains tax is charged depends on several indicators which you can use to your advantage to reduce your outgoings and avoid capital gains taxes.

In essence there are three main factors determining the tax rate applicable to your capital exchange. Some of these factors can be controlled, others cannot. The determining metrics are the income tax band you occupy, how long you have had the asset in question, and what the the asset is ( an investment, a collectible or real estate for example). The income tax band is not particularly easy to control but by carefully planning how long you will hold your assets for example, or where you will hold them and what you will hold you can reduce your capital gains taxes significantly.

For assets held less than one year the rate of capital gains tax is the same as your personal income tax rate. When the holding term for the assets become one year or more tax is charged at the long term rate. Depending on the asset involved this si the base rate you will be charged on most other capital gains you make. The base rate is dependent on your income tax rate and is much lower than the short term rate.It can be as much as 25% less in some cases - to put that in perspective in a capital transaction worth $800,000 you could save as much as $185,000 in capital gains tax (if you pay income tax at a high rate).

So by manipulating the holding term of assets (by holding onto assets for a year when possible) you can reduce your taxes by a large amount. Capital gains tax varies according to the type of the asset also, for example capital gains tax on the sale of collectibles is automatically 28%, tax on real estate gains is 25% - both significantly higher than the standard rates. There is little or nothing you can do to manipulate these rates. So unless it is clear that a large profit can be made on assets such as real estate, they should be avoided as they are taxed heavily.

Long term capital gains tax rates fell by 5% in 2003, and have fallen consistently for many years now, this trend is expected to continue in future. By taking advantage of falling rates and carefully considering holding terms and asset types you can reduce and avoiding capital gains tax and increase your profits substantially!