The duty of any government is to provide and cater for some essential services to the citizens. It therefore has to make money to cater for those services. One of the sources of revenues that the government relies on is the taxation on properties and any item sold. This revenue is then used to standardize the social living status of its citizens. It can also be used to improve and maintain the level of infrastructure in the country. There are many ways to tax the citizens as part of the governments effort to raise revenue through taxation (Cui, 2014). One of them is on the capital tax which is the amount of tax charged on the wealth earned by any citizen as a result of the sale or purchase of any property. For this reason, the government is always vigilante in the collection of this form of revenue as it serves a special purpose in increasing the amount of government revenue expectations. As part of ensuring that every person pays up capital tax, the government comes up with strict measures that ensure accountability and maximization of the capital tax gains (Cui, 2014). There are also punishment put forward through acts of parliament or congress to ensure that there is no incident of illegal tax evasion by citizens especially on matters to do with capital wealth. Despite all the stringent measures put by the government on matters regarding the imposition of capital tax, there are legal ways to avoid taxes provided one acts within the confines of the law. This serves as a way to reduce the amount of tax levied but not to completely evade (Poterba, 2013). This essay thus serves to provide an advice to a client on how he can avoid capital investment tax by using a different option in the sale of his property RE, a house.
In dealing with the case presented where the client is faced with the choice of sale of his house, RE, it is first prudent to understand the fact that taxation of income is associated with different risks. This is especially the case when a client decides to invest part of the income earned from a given source such as sale of property. According to the taxation laws, the government has a mandate to levy some amount of the income that will only be presented for taxation purpose (Allingham & Sandmo, 2012). For instance, in the case of the RE sale, the amount the client intends to sell it for is $7 million. This amount caters for the acquisition amount and the depreciation value of the building. He would thus attract taxation levies for the building price and this would prove to be a big loss even before the investor becomes the full owner of RE. As part of tax avoidance, it is feasible to go through the deferred sale trust because of some of the benefits accrued from it. It allows one to enjoy the privilege of deferring the taxation on the sale of a highly appreciated property as long as the seller chooses. In addition, the deferred trust ensures that the client will receive taxable income flow from some of the proceeds invested in the trust and the taxes that would have been paid (Poterba, 2013). There is also the aspect of lack of time frame on how long the client received the cash flow while delaying the payment of taxes. This happens continuously until the time he receives the actual proceeds from the venture (sale) at the time of his own choosing (Poterba, 2013). For the client, using the deferred trust, he will get the opportunity to defer the taxes for the other installments except only for the first one which amounts to $500,000. This investment choice is thus the better option for him owing to the fact that it gives him an advantage of not only evading the tax but it also guarantees him a good return for a period of ten years which amounts to $260,000 . After the ten year period, the total accrued principle will amount to $6.5 inclusive of the interest.
There are other ways of reducing taxation of the capital gains in RE that the client can adopt. A capital gain is the difference between the sales price you received and your basis in the asset. The basis of an asset may be the price that you bought it for. However, if youve made improvements to the asset, the cost of the improvements increases your basis. If youve depreciated the asset, that decreases your basis (Allingham & Sandmo, 2012). In the case of the client the property had depreciated but the original price had still increased due to some improvements and the mortgage payments. The client should track home improvement expenses. This is where she underwent some cost in adding some value to the apartment RE (Poterba, 2013). Such of these improvements are provided by the IRS are upgrading the doors and windows, redoing the floors, installing in-built appliances and remodels. This will significantly reduce the tax levied in the RE. More so, tracking the selling expenses will guarantee reduction of tax level. The IRS requires one to provide for evidence on costs incurred during placement of an order to sell of a property (Poterba, 2013). This may include; notes that settlement fees, broker commissions, escrow and closing costs, advertising and appraisal fees, points paid by the seller, title search fees, transfer taxes, and any miscellaneous document preparation fees can all reduce your capital gain(Allingham & Sandmo, 2012).
Taxation is attached to many misfortunes. This is because the government is eager to tax its citizens with an aim of improving the living standards. In the event of ensuring tax is levied, it over burdens the same citizens that would benefit from program. This has been a major challenge that the authorities have been unable to tackle (Dammon, Spatt & Zhang, 2001). In addition, a true income tax is conventionally considered unable to burden the returns to risk-taking. The theory is that investors respond to the tax by increasing the amounts they invest in assets delivering risk-based returns. If the increased investment makes money, the enlarged return covers the associated tax liability; if it loses money, the enlarged deduction cushions the loss (Dammon, Spatt & Zhang, 2001). This is an aspect that government should look into because it in turns burdens the property owners. This would lead them to taking other options like evading tax through enrollment to the DST.
Cui, W. (2014). Taxation of Capital Gains. Papers on Selected Topics in Protecting the Tax Base of Developing Countries, United Nations.Dammon, R. M., Spatt, C. S., & Zhang, H. H. (2001). Optimal consumption and investment with capital gains taxes. Review of Financial Studies, 14(3), 583-616.
Poterba, J. M. (2013). How burdensome are capital gains taxes?: Evidence from the United States. Journal of Public Economics, 33(2), 157-172.
Allingham, M. G., & Sandmo, A. (2012). Income Tax Evasion: A.
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