Avoiding Capital Gains Tax – How To Pay Less!

Hold Longer – Pay Less!

August 12, 2004
By Niles Brohey

Capital gains taxes are charged on profits made from selling or exchanging capital assets. The rate of capital gains tax charged depends number of variables, which you can manipulate and consider so as to reduce your outgoings and which help in avoiding capital gains taxes.

There are three key determiners effecting the tax rate applicable to you – the rate of income tax you pay, how long you have owned the asset which you are exchanging or selling, and what the the asset is. These three factors will effectively dictate the rate of capital gains tax levied. By carefully considering how long you will wait before selling your assets and what assets you will hold can reduce your capital gains taxes by a large amount.

The holding term of the asset to be exchanged is perhaps the most powerful determiner of the applicable tax rate and yet it is a variable you can control. The rate of tax charged depends on whether the asset is long term or short term – in essence whether you have owned it for one year or more or if you have owned it for less than one year. If you have held it less than one year it is a short term asset and the applicable tax is the same rate as your income tax. If however you have held the asset for one year or more it is a long term asset and is eligible for tax between 5% and 15% depending on you income.

By carefully considering and if possible maximizing the holding term of your assets your capital gains tax overheads can be sharply cut. Tax rates vary depending on the type of the asset also. Capital gains tax on the sale of collectibles is automatically 28% and tax on real estate gains is 25%, both rates are much larger than standard long term rates. Considering the high tax burden you take on when dealing in short term assets or highly charged assets like real estate you should be cautious of trading in them unless a large profit can be made.

For years now capital gains tax reform has been pushed legislatively and so long term tax rates are dropping with time, long term rates dropped by 5% in 2003 for example. By considering your investments under the key headings of holding term and asset type you can invest in areas which will minimize your tax liability.