Selling the Family Business? You Have Options; Each Has Tax Implications

For me, the end goal of tax planning not just how much tax savings can be gained. It is how those tax savings can be used to benefit the client in the most meaningful ways possible. A project I had recently illustrates this real value of proactive tax planning for taxpayers.

A man contacted me wanting to sell his family farm and retire. During all his years of farming he had thought the built-up equity in his farm would provide the bulk of what he would need to fund retirement. Unfortunately, that was not the case. To simplify it quite a bit, at a sale price of $2,250,000, and after the sale costs and debt he owed were paid, he would have no amount left at all on which to retire. Worse, he would have to pull more than $600,000 “out of pocket” to pay the rest of the $1.2 million in taxes he would owe. He was deeply worried.

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Warren Buffett Emphasizes Tax Deferral Above Avoidance

If someone offered you an interest-free loan to buy a house, and the offer was legitimate, you would take it. As Warren Buffet has said more than once, using active tax planning to defer taxes is exactly that: An interest-free loan from the government.

Buffett usually makes these remarks in the context of how he manages his portfolio of assets.

When he “buys” or “sells” a company, subsidiary or division, it usually involves a swap of assets or stock between the entities involved, avoiding a sale that involves the exchange of actual cash. Taxes on the appreciated value of any asset swapped would only become due when the assets acquired in the exchange are ultimately sold. As Buffett holds stocks seemingly forever (‘the best time to sell a stock is never,’ he has said), those taxes may never come due!

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Break the Homeowner Liquidity Trap with Better Tax Planning

Long-time Silicon Valley homeowners who bought homes back when there were more orchards than tech companies face a liquidity trap when they decide to sell their homes.

The dramatic rise in home values over the last 30 years has had the happy result of substantial return on the homeowner’s original investment. However, along with soaring appreciation rates comes a profit-crushing capital gains tax bill due for the year of sale the moment the sellers receive their sales proceeds.

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Texas Apartment Owner Sells – Defers Taxes Due Without 1031 Exchange

The tax deferral method most investment property owners use is the 1031 exchange. This IRS code tool encourages more active management of a real estate property portfolio; owners have more freedom to swap long-held properties for new, higher-yielding real estate while deferring capital gains and other taxes. So long as the owner wants to maintain real estate ownership, it can be a very useful planning approach to defer taxes.  

At some point, however, a property owner may want to jump off this merry-go-round and no longer want to own property.  He or she wants out and is looking for a viable exit strategy. This usually occurs when the owner wants to retire from active asset management and roll the accumulated asset values into more liquid investments to fund retirement. Or, perhaps they are forced to sell because of unforeseen events that have impacted their family. In situations like these a 1031 exchange is not a solution because it is a replacement strategy and requires the seller to purchase another property of equal or greater value than the one that was relinquished.

Jumping off the real estate ownership merry-go-round usually triggers that large deferred tax bill the moment the property is sold, escrow closes and the cash from the sale hits the bank account.

Or does it? 

It really is pretty amazing what tax planning opportunities are provided in the tax codes. 

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