Selling a Business?

Under the installment method, the seller recognizes a portion of each payment received as gain and the remaining portion as nontaxable recovery of basis, based on various formulas.

This can be a wonderful strategy when selling property or a business. We generally want to see our clients ‘spread out’ their tax bill over time, rather than pay all the tax up front, however, there are actually several advantages when using the installment method:

1. It provides a method of deferring taxes associated with gains from the sale of property.

2. A seller may structure an installment sale to defer payments and associated gains until a tax-advantaged year.

3. The installment method can be attractive to a buyer, because it provides a buyer with a full stepped-up basis in the purchased property in an amount equal to the agreed-upon purchase price, even though the buyer may have given only an installment note debt to the seller.

4. Thus, if the buyer buys depreciable property from a seller on the installment method, the buyer can take depreciation deductions based on the fully agreed-upon purchase price of the property, without having paid for the property beyond giving the seller an installment note debt.

Happy New Year and make this the best year for your business yet!! 

Happy Investing!

Today's blog courtesy of Mark Kohler,
www.markjkohler.com.

Tax Favored Environment

CPA and Attorney Mark Kohler, at a REAPS meeting last year, advised investors to own or start a small business (even MLM, but we will save that for another blog), invest in real estate, and take advantage of operating in a tax-free or tax-favored environment. These are notes from that talk.

Potential deductions for real estate investors, or anyone operating a small business are:

• medical insurance
• family employees, employees, subcontractors 
• annual meetings/retreats
• capital expenses
• equipment and furniture
• business travel
• meals and entertainment
• business board meetings
• job-related education
• legal and accounting fees
• office rents and utilities
• office supplies
• business gifts
• repairs and maintenance
• parking fees
• telephone, ipads, internet, office expenses
• professional dues
• postage and shipping

Travel is more carefully scrutinized, but some ideas for real estate investors are to buy something, negotiate an agreement, or submit offers, even if they are rejected; visit a rental, hold a corporate meeting, or meet with a client or vendor.

Keep in mind that these are typically paid with pre-tax dollars.

Here are a few reasons that Mark Kohler recommends investing in real estate:

• The tax write-offs are incredible when you treat it as a small business. You
  may get to use those deductions against your ordinary income, but if not, they
  will carry forward until you sell any rental property.
• The value of the property will grow tax deferred until you sell, and you may
  even use other strategies to delay or avoid the gain entirely.
•  The far majority of rental properties allow investors to create tax-free cash
  flow based on the amount of write-offs related to the property.
• You can leverage your money to buy more ‘investment’ and thus increase
  your ROI- Return on Investment (something you can’t do with stocks, bonds
  or mutual funds).
• You can involve family members, travel to check on your rentals as a valid
  business deduction, enjoy average appreciation and growth that out performs Wall Street, and a variety of other benefits. 
• MOST IMPORTANTLY…it’s like a forced retirement plan.

Happy Investing!

What is a 1031 Exchange?

If one of my commercial properties gets bought out this month, it would generate a significant profit - as well as the corresponding significant tax payments to Uncle Sam. So I have contacted my good friends at McFerran & Burns to discuss one of the two most common methods for deferring capital gains taxes on the sale of property: a 1031 Tax Deferred Exchange.

IN IT’S SIMPLEST TERMS a 1031 Tax DeferredExchange is a method of deferring the capital gains tax paid by an investor as real property is purchased and sold. The tax code permits a taxpayer to exchange property held for a productive use in a trade, business or as an investment for a property of a like-kind without recognizing income, therefore delaying taxes.

One of the best reasons for using this tool is by deferring the tax you are able to reinvest all the cash and equity. This opens the door to many options: property with higher revenues, relocation of investment properties, higher appreciation, increased or decreased actual properties as suits. Essentially it allows the investor to craft their business in manner that suits them best.

Here are some general rules related to a 1031 Exchange:

EXCHANGE must be completed within specific timelines, or capital gains tax is reinstated.

A QUALIFIED INTERMEDIARY is required to ensure Exchangor doesn’t have control over sale proceeds during exchange

EXCHANGE AGREEMENTS must be in place between correct parties on strict timelines

CASH FROM EXCHANGE can only be withdrawn at 4 limited times during the exchange

LIKE-KIND PROPERTY means “productive” investment real property rather than stocks and bonds, and not property to be held only for resale.

Thanks to Kevin Hummel at McFerran & Burns for help with this blog post.

Happy Investing!