As I've said before, the calls I dislike the most are from those individuals that have already sold their asset and are desperately trying to figure out a way to reduce their capital gains tax.
My business is not really driven by any particular event, such as tax filing time, but it is from February to April that a lot of people actually realize what their tax consequences are and panic.
In most cases, it is too late to do much but pay the piper. The tragedy is, the money is not always there to cover the bill.
A fellow in Florida sold a rental property last year at a nice profit. He had paid about 70K four years ago and sold for 800K. He owned it with another family member, and both had put quite a bit of money into fixing it up, and had taken out a number of high interest loans to finance it.
His tax preparer had told them they would only owe 5% in capital gains tax, so they each set aside 20K for taxes. After paying off the loans (including a large balloon payment), they each had about 120K left over.
Now with tax deadlines approaching, this same tax preparer has called them back and told them he was wrong in the estimates. What he didn't realize at the time he originally advised them, is that only a small portion was going to be taxed at 5% , and the majority will be taxed at 15%. He also neglected to mention the recaptured depreciation that will also be due, taxed at 25%.
They each will owe more than 40K in additional taxes come April 17. Neither party has this amount left over from their proceeds. They thought they were free to spend the amount left over after they set aside the original 20K. Luckily, they live in a state where there is no state capital gain tax or their problem would be even greater.
They will have to take out loans to pay the tax bill. All this could have been avoided had the right advice been given from the get go. The time to do research and seek specialized counsel is before the sale happens.
Paula Straub
760-917-0858
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