Manage Capital Assets as a Unit to Maximize Your Tax Benefits

This may sound like a commonsense idea, but if you own a portfolio of capital assets like commercial property or a business, you must treat the different assets as one portfolio wherever possible to maximize the tax benefits of owning these assets.

In my experience, too many people don’t think through asset and tax planning strategically, particularly when it comes to buying and selling their various properties. This results in lost opportunities to apply the tax law to your maximum benefit.

If you plan ahead, using a tax planner to help you clearly understand the quirks and opportunities of the IRS code, you can better time your ongoing expenses and property sales to reap the maximum tax benefits available to you.

You read that last sentence correctly: Your tax benefits!

Remember, the tax code is not created by the IRS. The Internal Revenue Service enforces the code and interprets the laws that Congress passes (with the help of Tax Courts). It is Congress that creates the tax code, and it has indeed created laws through the years that are specifically designed to reduce, defer and, yes, even eliminate taxes.

The trick is finding those statutes within the code that could reduce your tax bill if you managed your property portfolio carefully.

Of course, those same legislators tend also to come from the legal profession, so the way they write laws befuddle most tax-paying citizens looking for relief! Get help with that. Find a tax-planning professional to complement your hard-working CPA and financial advisor.

Let’s take just one example:

• Most commercial property owners know about 1031 exchanges that give them the right to defer all taxes on the sale of a property, if the proceeds from the sale are invested back into like-type real estate within a certain time frame.
• Most property owners do not know that there is also a perfectly legal way to defer for decades the taxes due on a sale even if the proceeds are not reinvested into other property.

The latter tax benefit is not well known for two reasons:

• It requires a focused journey through tax law that most CPAs and real estate agents don’t have the time for.
• The IRS is not apt to point it out, as their job is raising revenue, not deferring it.

Structuring asset sales to take advantage of such tax benefits are important. Selling a $1 million asset without considering alternatives could easily result in a $250,000 tax bill. Or more if you also pay state income taxes.

There are other examples of the value of planning for taxes in advance of making moves within your asset portfolio.

• How can you share costs between properties, for instance, to maximize deductions against income?
• Are you using added tax benefits available from properties you want to keep in your portfolio and use them to offset taxable capital gains on sale of other property?
• What profession do you self-report on your tax return? Some tax benefits only apply in certain professions, like real estate professional. If you generate income from property you own, you may qualify even if you do not work as a real estate agent.