So, you bought your estate for $500,000 and now you’re in a position to sell it for $600,000. You have made money and it’s time to celebrate the gain. However, you have to pay capital gains tax on your earnings. Before we go ahead and discuss strategies to reduce capital gains tax, it’s important to understand what a capital gain is and why you have to pay tax on it.
What is a capital gain?
Capital gains refers to the rise in the value of a capital asset such as real estate or investment. This occurs when the worth of your assets increase. In order to realize the gain, you have to sell the asset. When your asset appreciates in value, it’s called capital gain which is taxable. On the other hand, when your assets depreciate, it’s called capital loss.
Capital gains encourage people to invest for the long-term in real estate or property. When you sell an investment or asset for more than what you paid to buy it, the capital gains are added to your regular income. In order to minimize the capital gains tax, you need to work out a strategy. For example, it’s critical to choose the right time to sell your investments.
When you sell your assets for more than what you paid, you must declare the capital gains. For example, if you bought an estate for $300,000 and you sold it for $350,000, you have to declare a $50,000 capital gain. The inclusion rate for capital gain is 50%, which means $25,000 would be included in your total taxable income. The money you pay in taxes largely depends on your total income, province of residence, and how you take advantage of tax-savings strategies.
Reduce capital gains tax
Choosing the right time to sell your assets can prove to be an effective tax reduction strategy. If you wish to sell the asset which has made a profit, you may postpone the sale until after January 1st of the next year. If your income fluctuates, you can consider selling your assets at a time when your income is lower than usual. If you want to give money to your family members or you make charitable donations, you can use gifts or donations to reduce your capital gains tax.
Retirees need to plan carefully and consider their fluctuating annual income. A considerable increase in taxable income in one year can beef up the tax bill and trigger claw-backs of government income-based benefits. From creating tax deductions to using lifetime capital gains exemptions, there are other strategies to reduce capital gains tax:
Financial matters are complicated and you must manage your wealth carefully. Tax planning plays a key part when someone puts effort in to optimize their wealth. To make life easier, you should consult a financial planner to learn more about your options to reduce your annual tax bill.
About Kewcorp Financial
Kewcorp Financial is a team of financial planners in Edmonton who provide objective guidance on several financial matters ranging from estate planning and taxes to investment and retirement. Contact us to discuss your situation!