What the Analysis Actually Examines
A plain account of what goes into a transaction tax analysis, what comes out of it, and what it will not tell you.
People ask what we actually do, and the answers they get from our industry tend to be vague in a way that should make them uncomfortable. So here is the unglamorous version.
A mystery, someone once told me, is simply truth that has not been revealed yet. Let me pull back the curtain on ours. There is less mystery in it than you would expect.
What we ask you for
Nothing exotic, and nothing we cannot verify.
- The asset. What it is, when you acquired it, what you paid.
- Adjusted basis. Original cost, capital improvements, depreciation claimed to date.
- The transaction. Price under discussion, expected costs of sale, expected close.
- Entity. How the asset is held, and who the owners are.
- Debt. Balance at close, and whether it exceeds basis.
- Income. Your other income for the year of sale, because it sets your rate.
- State. Where the asset sits and where you file.
- Objectives. What you intend to do with the proceeds.
That last item is not a formality. A seller who wants liquidity, a seller who wants income, and a seller who is thinking about what passes to his children are three different problems with three different answers, even when the transaction is identical.
What we calculate
First, the conventional outcome. What happens if you do nothing beyond what is already planned.
That means the full federal and state tax profile of the sale. Capital gain, depreciation recapture separated by the rule that governs it, net investment income tax, state income tax, and the debt-over-basis question if it applies. The result is a single figure: what reaches you after close of escrow.
Every other number in the analysis is measured against that one.
Second, the alternatives. For each approach that fits your facts, the same calculation run again, plus the cost of implementing it, plus the timing of when funds are actually available to you. Side by side. Same format.
What comes back to you
A written comparison. Conventional outcome in one column, each alternative beside it, with the assumptions stated.
Typically within three business days.
If the analysis supports a recommendation, it names it, along with what it requires of you and what it costs. If the analysis does not support one, it says that instead, and we are done. A disqualification is a legitimate result of this work and we produce them regularly. I would rather send a seller away with an accurate answer than keep him in a process that will not help him.
What it will not tell you
Several things, and I would rather set them out now than have you discover them later.
It will not tell you whether to sell. That is a business decision and it belongs to you.
It will not predict a market. Every number in the analysis rests on facts you already possess and on published rates. There is no forecasting anywhere in it. That is precisely what makes it different from the pro forma on the property, and it is the reason I trust the output.
It will not replace your CPA or your attorney. It is built to be handed to them. Which brings me to the part people most want to know.
Who is in the room
You, your CPA, your attorney, and us. In that order of authority.
We do not prepare your return. We do not execute the structures we recommend. We produce the analysis, we bring in the specialist firm that implements, and your own advisors verify the whole of it before you commit to anything.
I put that verification step into my own description of this method years ago and I have never regretted it. There is wisdom, as an ancient proverb has it, in many counselors. If your CPA reviews our work and finds a flaw, I want to know about it before you sign, not after.
The one thing I would tell you to do first
Find your adjusted basis.
Not an estimate. The actual figure, including every capital improvement and every dollar of depreciation claimed. It is the input that drives more of the output than any other, it is the one most sellers cannot produce on request, and it takes a call to your accountant to obtain.
Make that call this week. Whatever you decide afterward, you will be deciding with a real number.
This information is general and is not tax, legal, or investment advice. Every situation is different. Work with your own CPA and attorney before acting on any strategy.
Questions people ask
What information do you need to produce the analysis?
We need details on the asset you are selling, when and what you paid, your adjusted basis including capital improvements and depreciation, transaction price and costs, how the asset is held and by whom, debt balance, yearly income, state tax filings, and your objectives for the proceeds.
What does the analysis actually calculate?
It first calculates what you will keep after federal and state taxes if you make no further moves. It breaks out capital gains, depreciation recapture, net investment income tax, state income tax, and debt-over-basis if it applies. Every alternative is then calculated side by side against this outcome, including implementation costs and timing.
What do I get from the analysis?
You receive a written report comparing the outcome of your current path to each alternative that fits your facts. Each approach is laid out clearly, with assumptions and costs stated. If no alternative clearly benefits you, the analysis will simply state that, and the process ends.
Who reviews or signs off on the recommendations?
You, your CPA, your attorney, and the firm are all involved. You have authority. Your CPA and attorney review every step before anything is finalized. The firm provides the analysis and brings in the specialist firm if you move forward, but your advisors verify the plan before you act.
What should I do before starting this process?
Find your exact adjusted basis. Not an estimate, but the real number, including all capital improvements and every dollar of depreciation claimed. Most sellers cannot produce it on short notice, and it usually takes a call to your accountant. This number drives much of the analysis.