Capital Gains Threatening to Eat Your Lunch?
By Lewis J Carpenter, Vice President of Investor Relations
One of the many satisfactions of owning a business venture is passing it on, when the time comes, as a legacy to children and grandchildren.
That’s what one fourth-generation farmer who’d inherited his family’s farm was thinking as the legacy had grown over the years and allowed him to enjoy a six-digit annual income. But by the time he was ready to retire, his grown children were raising their own families and had no interest in taking over the farm.
While the farmer wanted to sell and enjoy his retirement, he would have faced a big capital gains tax bill from the IRS. The money from the sale wouldn’t be enough to generate the annual income that he was accustomed to.
He’s not the only farmer who faces a scenario like this. After years of hard work, when you want to slow down and enjoy the fruits of your labor, it’s painful to think about giving up a big chunk to Uncle Sam. When it’s time to sell your business, farm, rental property, or any highly appreciated asset, the reality of a significant capital gains tax bill may even stop you from going through with the sale.
Let’s say you faced a tax bill of well over $100,000. Even though we all accept that paying taxes is one of life’s certainties, it’s hard to stomach the thought of signing that much money over to the IRS.
There is good news. Some taxes, including capital gains, can be avoided through a deferral strategy. This doesn’t mean you no longer have the tax liability, but that you can defer the capital gains tax to a later date. While you may choose to pay the tax instead of deferring, as capital gains taxes are at an all-time low, it’s important to know your options.
There are a number of deferral strategies to consider. They can be used long-term, allow you the opportunity to reclaim your tax bill, and create additional income and growth. Be aware that a deferral strategy needs to be in place prior to the sale of your asset.
Long-term deferral strategies can be used until the individual passes away. At that point, the capital gains tax liability may be passed through to heirs on a “stepped-up” basis, which negates the capital gains tax liability.
In the fourth-generation farmer’s case, with the help of professionals, he was able to implement a plan and got help facilitating the sale of his farm with the best possible outcome. Instead of paying the large capital gains tax bill, he was able to invest his money and enjoy his retirement and his six-digit income lifestyle, with a yearly increase to his income to keep pace with inflation.
To top it off, when he passes away, his inheritance will pass on to his children, and they won’t have to pay capital gains tax.
Regardless of the strategy you ultimately choose, it’s vital that you work with professionals who specialize in long-term strategies that can help you get the most of your business, farm or rental property sale.
Your legacy is at stake.
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