There comes a point in time when most every commercial property owner decides they would like to sell the property, kick back and enjoy the benefits their hard work has earned them. For them, investing energy and money into yet another 1031 exchange to buy another property just to defer the taxes no longer sounds attractive or even makes sense to do.
No more fixing toilets or repainting or replacing carpet. No more lost income when a tenant moves and having to pay all that money to fix up the apartment and find new renters. No more chasing tenants to pay their rents! Cashing in the property sounds great!
But, then the mind snaps back to reality. “If I sell, how much of the proceeds do I actually get to keep to fund my lifestyle? What do I do about the hundreds of thousands of dollars in capital gains and other taxes I would have to pay to the IRS and the state? Maybe I can’t actually afford to sell?”
Triggering capital gains taxes is the most common deterrent that keeps a property owner from confidently moving forward to sell their appreciated property. This fear, however, is misplaced: Our tax laws actually provide legal, viable ways by which we can mitigate taxes and keep more of the gain when we sell our properties. Using common tax planning techniques, here are some results that property owners gained by properly applying tax law:
- John and Lucille sold their eight-unit apartment building, solved a $300,000 capital gains tax problem and generated enough extra income to pay for their children’s college education and allow John to retire.
- Larry and Susan discovered that current tax law permitted them to save more than $10 million in taxes when their corporation sold its $16 million commercial real estate portfolio.
- Jim learned how to save more than $1 million in income taxes by tapping into specific laws enacted by Congress that improved the tax benefits he receives from his existing real estate portfolio (Jim was not selling at the time).
Three Simple Tax-Saving Steps
What “magic wand” did these folks use to banish their tax worries and keep more of their proceeds? No magic wand. They simply found the laws that Congress has already provided that let them reduce and, in some cases, eliminate taxes. Here are three simple steps you can take to solve your tax concerns:
- Project out the taxes you will have to confront if you sell a property. As an ancient sage once said, “Know your enemy.”
- While working with a competent tax planner, search out and identify the most viable planning options available. Then double-check their authenticity through independent tax and legal authorities.
- Tailor these solutions to your specific circumstances to solve the tax problem and maximize your profit and income at sale.
John and Lucille, Larry and Susan and Jim took these extra steps and found great reward. Doesn’t it make sense that you do the same?
Congress encourages us to lower our tax bill
Many property sellers falsely believe that little can be done to safely and legally reduce the taxes they think they have to pay. Consequently, huge amounts of capital gains and income taxes are needlessly paid each year. Savvy taxpayers, however, understand that the Internal Revenue Service does not create federal tax law—Congress does, and it likes to give out tax benefit goodies. Laws designed to reduce and even eliminate taxes have been on the books for years and are ready for taxpayers to use.
No one risks anything by first understanding a tax issue and then learning what options are available to solve the problem. This is just good old common sense put into action.
Take a Tip from one of the World’s Richest People
Reportedly, early in his career Bill Gates, formerly of Microsoft and now one of the richest men on the planet, was asked: “What would you say is the single most important item to which you can attribute your success?” He did not proclaim hard work or a focused commitment to his business plan as being the reason for his success. No, Mr. Gates’ answer was both more subtle and powerful: He declared that he acquired a good working knowledge of the tax codes.
Reducing taxes must be a key goal if you plan to sell appreciated property, so learn all the viable options available to you before you make the decision to sell. Understand how these solutions impact your long-term cash flow, and then take action to successfully meet your objectives. You can then confidently move forward to list, market and sell your property using a structure that you already know is blessed by Uncle Sam and which will maximize your profit and income for you and your family to enjoy.