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What Is Capital Gains Reinvestment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 December 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Capital gains reinvestment is a financial strategy that involves routing any capital gains generated by the sale of property or similar assets into new ventures that are likely to generate some sort of return. The idea is to identify investment opportunities that not only hold the promise of generating additional revenue in the future, but also help to minimize the tax burden that is associated with those capital gains. In order to manage both these goals, developing a specific plan of action for capital gains reinvestment is extremely important.

Choosing the right opportunities is key to any viable capital gains reinvestment scheme. Before actually settling on the type of opportunities to consider, take the time to find out which types of investments would actually help to reduce the tax burden. Depending on current regulations imposed by jurisdictional tax agencies, there may be no more than a few options to consider or a number of possibilities that vary in type and potential. Evaluate each possible option closely in terms of what type of tax break the investment would provide and the anticipated profits that would occur over a specified period of time. In some cases, the returns may be so low that choosing a different investment and paying the higher tax would actually be the best bet in the long run.

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It is also important to be aware of any limitations on how much of a tax break a given capital gains reinvestment opportunity would provide. In some nations, rolling the profits from the sale of capital assets into a retirement account may create a tax break for a maximum amount of those profits, or maybe even allow a full deduction of all those profits, depending on what type of asset was sold. For example, a larger break may be allowed if the profits from the sale of a primary residence are involved versus the sale of a secondary property such as a vacation home.

With any capital gains reinvestment strategy, don’t consider only the immediate benefits. Take the time to explore how the investment will generate benefits over the long-term, and how those benefits will increase financial security. The ultimate goal is to obtain the best possible benefits now, while also going with an opportunity that will produce ongoing benefits in the future. Doing so makes it easier to avoid investments that seem like a good idea on the front end, but ultimately end up costing a great deal over the years.

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