Deferral Versus Elimination of Taxes

Deferral Versus Elimination of Taxes

The Deferral Versus Elimination of Taxes If you are going to sell a capital asset at a gain, you have to make a choice: you can pay the taxes, defer the taxes, or eliminate the taxes. Each has its pros and cons, so the answer is not as easy as it may appear. You don’t need a book to show you how to pay taxes, so presumably you are reading this to learn how to defer or eliminate taxes. Nevertheless, sometimes the option to just pay the taxes is a choice worth considering.

If the gain is a small one and you are at a point in your life where the goal is to simplify, the choice of just paying the taxes may be a good one. If you are like most people, however, you are looking for alternatives. Methods are available for both deferring and eliminating capital gains taxes, but each method comes at a cost and each has advantages and disadvantages.

Most of the time, the decision comes down to “doing the math,” but not always. For example, people can completely eliminate their capital gains taxes through a charitable remainder trust, but the property has to ultimately be given to the charity. Some people choose this alternative strictly for the personal financial benefits.

Others may choose this same option, not for the financial benefits, but because they like the idea of giving Uncle Sam’s money to their favorite charity. Likewise, deferral methods like 1031 exchanges and private annuity trusts accomplish the goal of deferring the taxes but have costs and disadvantages that must be taken into account. And like the example above, different people may use the same method of tax planning but for completely different reasons.

The immediate short-term objective for all of these people is to not pay capital gains taxes, but which method is best depends on each person’s specific long-term objectives.