CHECKMATE EXIT TAXES - 50 ways to leave your taxes

Paul Simon sang “…fifty ways to leave your lover…”.

There are NOT 50 (at least legal!) ways to “checkmate taxes on exit” from the sale of realty, company, or other assets.

Consider the following, though, as an outline of what you may want to consider.

FAIL – If you own several operating companies, where sale (or dissolving) of one is a consideration, discuss with your accountant how to allocate (within reason) income and expenses to the company giving you the best advantage.

STRUCTURE – Hold assets you may want/need to sell (e.g., real property) NOT in a C Corporation (to avoid double taxation on sale – both at corporate and personal level).

OVER ALLOCATE – When acquiring a portfolio, with cooperation of the seller, over allocate value to the asset you will be most likely soon sell, so that your gain on that sale is minimal.

GIFT – When you give away (even partial) ownership to a 501(c)(3) charity, you can reduce your gain subject taxes.  Also consider how you might bifurcate an asset – give the charity the asset but retain the rights to the cash flow for a period of years (easiest to do with an illiquid security – e.g., NTREIT, DST).

GRANT / SELL – Are there members of your family who are in a lower tax bracket? Give (or sell) them a minority interest in your firm prior to sale.  When the asset is sold, assuming they hold their interest for at least a year (to obtain capital gains treatment), they may face a lower tax rate (than you). 

LIMITS – Is “lifetime gifting limits” your issue? A minority interest in an entity can be discounted for tax purposes (the concept being that a minority interest has no control, hence for tax purposes is of less value than a similar size of “control” interest).  

1031 LIKE KIND EXCHANGE – When you sell real property, held for business or investment purposes, you may defer the recognition of capital gains (following very specific IRS rules), when you roll 100% of the equity proceeds into another property (also held for business or investment purposes) of equal or greater value of the property sold. This option has been part of the tax code for over 100 years!

REALTY VS BUSINESS ALLOCATION – You may wish to over allocate value (in a combined sale of business and realty), with cooperation of the buyer, to your realty (as you will generally find it easier to complete a 1031 like kind exchange transaction for tax deferral purposes).

WIZARD OF OZ – ANY capital gain can be rolled into an investment into a qualified opportunity zone (“OZ”)  – acquiring – in the OZ - real estate, a business, or equipment – resulting in a multi-year deferral of capital gain taxes AND – when you hold the investment for 10 years before sale – there is NO tax on any gain (100% waiving of tax on federal level; most states have adopted the same rule). OZ extension legislation is anticipated from Washington late in 2025.

DEFERRAL SALE – Taxes on sale are due current, even if you take back a note (so you must pay the taxes, and you may need pay your taxes out of your savings!). On the other hand, via a deferral sale (when only part of the ownership is passed each year), you are required to pay taxes only that portion which transfers in that respective year. 

TRUST VEHICLE - How do you avoid having to depend on the seller to pay the years of deferral sale payments? Consider inserting a trust vehicle, which receives the proceeds of sale and transfer 100% of ownership to the buyer BUT is paying to you proceeds as if it was a deferral sale (typically 10% of principal – plus earned interest – every year)! Complicated? Of course, that is why we pay big bucks to attorneys and accountants!

BOTTOM LINE 

You have worked a lifetime to build a financial nest egg (and maybe also you married exceptionally well!).  Do not give away up to one third of your assets to the government when the tax code encourages taxpayers – as with an IRA or 401(k) – to set aside potential capital gains into a vehicle which will support you as you age.

Reach out to Rick Chess for insight on how the above might apply to you (rick@chesslawfirm.com), then meet with your attorney or accountant (once you have some comfort with the concepts), and start planning for your life AFTER you sell your assets!