Here are some great ways to lose money on the sale of your appreciated asset.
1. Forget exploring options and pay all taxes due at once from proceeds of sale.
Most sellers get an offer, sell their asset and don’t or even know about all the tax consequences until their tax return is due. Then it’s too late to do anything but pay the piper, and the bill is usually much larger than anticipated.
2. Borrow money against the asset during ownership or prior to sale so that you owe more than your adjusted cost basis.
This is called mortgage over basis and is a problem for a lot of owners. It is a common misconception that taxes are only owed on equity in the asset (what’s left after paying all the creditors). Imagine the surprise when you might have to dig into savings or take out a loan to cover the tax bill!
3. Become the banker for the buyer.
It may sound appealing to make out your own installment agreement with the buyer, where they pay you over time with interest and you get to defer your taxes. That is, until the buyer defaults, is slow to pay or you have to go through the foreclosure process and get the asset back in worse shape than you left it. If this is retirement income you may not be able to afford missed payments, court costs or pulling money from savings to get the foreclosed asset back up to par.
4. When you hold the installment note, the sellers refinances and you get the tax bill.
Another downfall of being the bank is that if the buyer refinances the loan and pays you back all at once, your tax deferral ends there. That nice long income stream is gone and you get to pay the remainder of tax due.
5. Opt to do a 1031 property exchange to save on taxes and have the exchange fall through.
This is a fairly common occurrence if not enough properties were identified for exchange, the sellers pulls out, or any of the other IRS deadlines are missed during the process. Now all taxes are due and you no longer have any options.
If only someone had warned you of what might happen before it was too late…
The good news is that there are options to consider that can avoid all of the above mistakes if you know how to find them.
The Deferred Sales Trust™ is a very effective and tax compliant tool which can help you maximize your proceeds and minimize your tax consequences. Developed in 2002 and available exclusively through members of the Estate Planning Team, the DST allows for safe tax deferral and effective financial planning which can facilitate a secure retirement. For more information and an illustration of the Deferred Sales Trust™, go to http://www.mydstplan.com/savegainstax
Paula Straub, a capital gains tax saving strategist and owner of Save Gains Tax LLC in San Marcos, CA is able to compare and contrast a number of tax strategies and help sellers across the United States maximize their sale proceeds. Paula can be reached directly at (760)917-0858, savegainstax@gmail.com, or at http://www.savegainstax.com .
Collecting more taxes than is absolutely necessary is legalized robbery. ~Calvin Coolidge
The avoidance of taxes is the only intellectual pursuit that carries any reward.
-- John Maynard Keynes
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