In tax planning, hindsight really is 20/20, for three reasons. First, you can learn from past actions what NOT to do in the future and position yourself to reduce future taxes. Second, in some cases you actually can identify and retrieve income taxes you may have unknowingly overpaid in past years.
Third, even if you have triggered a taxable event in this year by selling appreciated property, you can still explore options for reducing or eliminating capital gains taxes owed.
Dig through your entire asset portfolio for hidden tax benefits
America’s largest corporations have well-paid staff in place to capture every possible opportunity for profit. This includes installing procedural systems to insure that they do not overpay taxes. After all, every dollar saved in taxes equals a dollar more in bottom-line profit. Small businesses need to adopt that same mindset, and invest in active tax planning and management to make sure they also don’t leave tax benefits unclaimed. To do that, you need to take the time to dig through your entire portfolio of assets and manage them as a unit. This is simply prudent business management, and it starts with obtaining what we call a “Second Opinion Tax Diagnosis™” from an experienced tax planner to complement the work of your CPA and financial advisor. And unlike large corporations, you don’t pay for this talent upfront. Most qualified tax planners only take payment if they find you new tax benefits to claim.
Who should run a thorough exploratory tax diagnosis?
Are you an entrepreneur operating as a sole proprietor? Do you own or are a partner in a C or S-corporation, an LLC, a general or family partnership? You are a candidate for this analysis. Even if you are not a small businessperson, if you own a lot of real estate, you should also take advantage of a complete tax diagnosis to investigate your options.
Here’s a typical example: A busy radiologist also owned a number of commercial properties that he personally managed. As an active acquirer of property, over the years he had accumulated substantial suspended losses that were never deducted.
His Second Opinion Tax Diagnosis™ found that his specific circumstances qualified him as a “real estate professional” by IRS definition, rather than as a medical professional. He was not being treated as such on his tax returns. By correcting this error in his previous tax returns as well as his status going forward, he was able to unlock these suspended losses and deduct them against his other income. This resulted in him enjoying a net recovery of $140,000 from his prior years’ tax returns.
Solving the Capital Gains Tax Problem on Property Sold This Year
Capturing these tax advantages starts not with the property just sold, but by examining the investment properties you still own to determine if they can provide hidden tax benefits of which you are unaware. Properly implementing these laws can provide increased tax-free cash flow for you to enjoy this year. Or, you can use the accelerated depreciation to help offset the capital gains and depreciation recapture taxes on property you sold last year or plan to sell this year. Here is an example:
Without considering the tax impact, a property owner sold one of his rental properties. He soon discovered afterwards that he was subject to nearly $100,000 in capital gains taxes. In reviewing his asset structure with me, I found that he owned several apartment and commercial buildings, and evaluated each property to see if any added tax benefits could be found for his use. The analysis disclosed accelerated depreciation was available from eight of his remaining properties and that he could use this amount to completely offset the taxable gain on the property he sold. Because we discovered this before he filed his previous year’s taxes, this newly-found tax benefit was applicable to the previous taxable year. This resulted in him paying no taxes on the sale and pocketing nearly $100,000 more in tax-free profit!
If you sold an appreciated asset such as real estate, stock or a business last year, you may still be able to reduce or eliminate the capital gains taxes you expect to pay if you examine your entire asset portfolio for possible unclaimed tax benefits.