Sales and Their Related Tax Implications
The Henssler Financial Group Position Paper
I
always emphasize to clients that sound business decisions should include understanding the income tax implications. However, all too often,
I find that taxpayers make business decisions to sell property and in April of
the following year act as if the tax consequences of what they have done is a
grand revelation to them.
If you sell something — stocks, bonds, mutual funds, your home, rental property, your coin collection, your car, anything — Uncle Sam is peering over your shoulder trying to determine if he can have a piece of the pie. Although taxes should not be an overriding concern, a general understanding of how your decisions affect your tax bill is imperative. Many times the mere structure of a transaction can make an overwhelming difference in how much of the pie you get to keep and how much goes to the Tax Man.
At least three things you need to consider when contemplating a sale of property are:
-
What is my cost basis?
- How will the sale be treated for tax purposes?
- Are there special tax rules or elections that might ease the income tax burden?
Basically, your cost basis in property is what you paid for it in cash, debt obligations, or other property or services and includes sales tax and other expenses connected with the purchase. However, after you acquire property, certain events may occur during your period of ownership that may increase or decrease your basis; for example, items such as the cost of improvements add to your basis and items such as allowable depreciation and insurance reimbursements for casualty and theft losses are deducted from your basis. The net result of cost plus increase items minus decrease items is referred to as "adjusted basis." This is the amount used to calculate your gain or loss for income tax reporting purposes.
Generally, gains from the sale of property are taxed at either the maximum 15% capital gains rate, the marginal (your tax bracket) rate, or a combination of the two rates. On the other hand, losses may be non-deductible, partially deductible or fully deductible depending on the type of property sold, the holding period and a variety of other factors. Different assets have different tax rules; not all sales are created equal and as with anything tax related, there are complications and exceptions that can arise.
Regardless of whether you expect to incur a gain or loss, there might be a way to strategically maximize the amount you get to put in the bank; you might even be able to avoid current tax liability altogether. There are many specialized rules that possibly can be invoked to ease your tax burden. But, be careful! The caveats are generally unforgiving and require careful planning.
It all boils down to knowing the tax rules for what you are selling. If you cannot answer each of the questions above, then seek the advice of a qualified tax professional. Otherwise, you may become a believer after it's too late.
If you would like any further information regarding this issue as well as any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.