You may own assets that have appreciated in value since you purchased them.
If you sell these assets, you could be subject to taxes on the appreciation.
Depending upon the type of asset, there are several strategies that can be employed to reduce, defer, or even avoid the tax upon their disposition.
Tax-Free Exchange
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Commonly referred to as Sec 1031 exchange in reference to the tax code section covering exchanges.
This type of strategy is frequently used to defer taxes in real estate held for business or investment purposes by deferring the gain into a replacement real estate property also held for business or investment purposes.
Tax-free exchanges are also available for non-real estate business assets, but must conform to stringent like-for-like requirements.
Tax-free exchanges do not apply to personal use real estate holdings, such as your home or second home and generally do not apply to publicly-traded stock.
Installment Sale
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By carrying back the paper (loan) on the sale of an asset, you can spread the gain over a period of years.
In these types of arrangements, the gain and nontaxable return of capital are taxed proportionally over the term of the sale agreement thereby, deferring the tax on the gain portion until actually received.
Charitable Gift
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Consider replacing your cash charitable gifts with gifts of appreciated property.
Give the asset to your favorite charity and you get a charitable contribution deduction equal to the fair market value of the gift and at the same time avoid having to report the gain from the asset on your return.
However, the maximum deduction for gifts of this type can be as low as 20% or 30% of income (AGI) as compared to 50% for cash gifts.
Charitable Remainder Trust
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This technique allows you to contribute your asset(s) to a trust, which in turn pays you an income during the remainder of your life and leaves the balance at your death to the charity.
The assets you contribute to the trust can be sold within the trust without any tax consequences to you.
In addition, when you form the trust, you’ll get a charitable deduction for the estimated amount that the trust will leave to charity when you die.
The amount of income paid to you each year is flexible (within some limitation) and provides annual funds, which can supplement retirement needs.
Gifts to individuals
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Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee.
This can work to your advantage by gifting the appreciated asset rather than giving the donee cash.
For example, you are paying for a child’s college education.
Instead of selling some appreciated stock for the schooling, gift the stock to the student, who can sell it in a much lower tax bracket and pay for their own expenses.
The foregoing are abbreviated summaries of tax strategies that may have addition restrictions or other tax ramification.
You are encouraged to consult with Your CPA (Certified Public Accountant) before attempting to employ any of these strategies.
