A client sent me a note of thanks recently. He had planned to sell a commercial property this year, and he faced the issue of a hefty capital gains tax bill. He had held the property for a long time as an income-producing property, and it had appreciated quite nicely. The client asked me a simple question: Is there any part of the tax code that allows tax deferral without having to reinvest the sale proceeds in another income-producing property? He wanted to be done with owning and managing properties, so a 1031 exchange was not an option.
The short answer was “yes.” There is a mechanism baked into the tax code for deferring for a lengthy period of time the tax payment on capital gains. But it only works if you structure the sale of the property (or business) a particular way. As this client smartly called me ahead of initiating the sale, we did have the chance to set it up properly to meet the requirements for deferring the taxes that would otherwise be due.
Give Thanks to All Those Who Make Tax Benefits Possible
The client sent his note of thanks to me, but to whom should his thanks really go? My role was simple: I connected the client to the part of the tax code that delivered him a significant tax benefit.
In the spirit of Thanksgiving Week, however, this client should buy a thick pack of Thank You notes and send one to every person who made his financial benefit possible.
First, he should send himself a note. He had the good sense to call a qualified tax planner to get advice before making a big tax-triggering move like selling a long-held commercial property.
His second note (or set of notes!) should go to the legislators who wisely wrote his tax benefit into law many years ago.
Lastly, and perhaps surprisingly, his third round of thanks should go to the IRS and those in government who rightly interpret the laws passed by Congress to reduce, defer and sometimes even taxes. Although the IRS will almost never voluntarily disclose to taxpayers ways to minimize their taxes, it also doesn’t usually challenge implementation of those statutes which provide significant tax relief when they are clearly proven to be law.
I, of course, do not write the tax laws. However, what I can do, once I understand the problem, is to point people to those laws that provide the greatest amounts available in tax benefits and help them to obtain them.