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We have a primary residence now in an area where homes have depreciated. We have a rental in a different city where home prices have gone up. We would like to sell the rental home to purchase a new residence to live in. Can we do a 1031 exchange, or is there a way to avoid capital gains?

Hello, I am the CEO of a small web design company. I’m also heavily invested in the stock market. I’m wondering if it is possible to channel my capital gains that I make through the stock market through my small, incorporated S Corporation, to save on taxes. Currently, short term capital gains in the stock market are upwards of 35-40 % for larger gains. Thats just way too much to be giving to the government.

Thanks if anyone can help.

I’ve already accumulated about $45,000 in short term capital gains this year. I need to liquidate another $40,000 in stocks or sell part of an inherited IRA which, as I understand, will be taxed as income. Is the tax hit going to be the same either way?

Last year I had taxable income of about $53,000 with next to no capital gains. This year I expect about the same taxable income plus the capital gains.

I guess what I really need to know other than the percent in WA state is…Do you pay capital gains on the full selling price or only on any profit you make or???
I bought a little rental house, which I should not have done, because I do not understand the financial ins and outs. Now I would be happy to sell and just get my original investment back…Any help will be deeply appreciated. Thank you

Thinking of selling your business? If you have planned it correctly, most of your transaction proceeds should be long term capital gains. Given the current political climate and the upcoming change in the White House, capital gains taxes will come under attack. If you are a business owner and are thinking of selling your business within the next 5 years, you may want to move up your exit timeframe says Dave Kauppi, President of MidMarket Capital, a Merger and Acquisition Advisor.

The reduced 15% tax rate on capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. In 2011 these reduced tax rates will revert to the rates in effect before 2003, which were generally 20%.

Kauppi believes that with the AMT currently targeted for elimination, the $23 billion will be made up by raising taxes elsewhere, and I believe this “owner of capital” tax is the most vunerable for increase. I expect that the long term capital gain tax rate will be moved to an upper limit of 25% by mid 2009 for the high end income bracket.

Translation, the business seller is going to take a big hit on his after tax proceeds if his business sale is concluded after July 1, 2009. Let’s look at a quick example. A 63 year old man started his business 25 years ago and he sells it for $5 million. All his equipment has depreciated so his basis is approximately $0. Under current tax laws he would have a $5 million capital gain from the sale of his business. His after tax proceeds would total $4,250,000.

If he sells after July 1, 2009, and the tax laws change as I am predicting. The same sale would net him $3,750,000. He lost $500,000 because of this change. If you wait until the actual change is voted into law, there will be a rush to the exits causing an unusually high number of business to be for sale. That would further reduce proceeds for the seller because of supply and demand pressures.

The most important tax issue, however, for the business seller continues to be the corporate structure (C Corp, S Corp, or LLC) and whether the business sale is an asset sale or a stock sale. First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10-year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.

Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.

Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.

This anticipated change to the capital gains tax rates will certainly add to the complexity of selling a business. I can not stress how important a factor taxes will be in your successful business exit. Here is my summary checklist:

Tax Consideration Checklist
Get Good Advice on Original Corporate Structure
If C Corp – Retain Ownership of all Appreciating Assets Outside Corporation – ie Real Estate, Patents, Franchise Rights: avoid double taxation
Look at Deal Economics First, Taxes Second
Make Sure Your Transaction Support Team has Deal Experience
Before You Go To Market, Work With Your Team to Understand Deal Structure vs After Tax Proceeds
You Have the Right to Pursue the Minimum Payment of Taxes – Exercise Your Rights
It Is Never as Effective as an Afterthought
The Pros Can Match Your Desired Outcomes With the Right Tools

Be agressive in your tax positioning of your sale, both with the buyer in your negotiations and with your filing with the IRS. The give and take on deal structure with the buyer is just one of the many factors that you will negotiate along with total purchase price and cash at close.

I need help. I’ve done tons of research but neet to know if anyone can point to to a definite answer. I spent 17 months building a house only to find out 2 weeks before closing on it that my husband was being let go from his job. He works in a highly specialized feild and we had to move to another state to find work for him. Needless to say we sold put the house up for asle the same day we closed on it. We bought it for 398k and since it too 17 mos to build sold it for 560k. We owned the home for 3 months before we sold it. My question is are we eligible for any kind of tax break on the capital gains because of the unforeseeable circumstances (moving for a job)? The irs mentions this, but doesnt go into detail. I need to know so i can plan in advance or find out if i am going to be stuck with a huge tax bill. My profits went into our new house in the new state, so I need to start planning now.
I lived in the house with our kids for 3 months until the sale went through while my husband went to work in another state, then we joined him. Also the IRS says there are special exceptions for the unforeseeable circumstance of having to move for a job but doesn’t tell me what they are so i can figure what my taxes are going to be. Thanks for the answers so far!

Thinking of selling your business? If you have planned it correctly, most of your transaction proceeds should be long term capital gains. Given the current political climate and the upcoming change in the White House, capital gains taxes will come under attack. If you are a business owner and are thinking of selling your business within the next 5 years, you may want to move up your exit timeframe.  

The reduced 15% tax rate on capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. In 2011 these reduced tax rates will revert to the rates in effect before 2003, which were generally 20%.

We believe that with the AMT currently targeted for elimination, the $800 billion will be made up by raising taxes elsewhere, and I believe this “owner of capital” tax is the most vulnerable for increase. I expect that the long term capital gain tax rate will be moved to an upper limit of 28% by late 2010 for the high end income bracket.

Translation, the business seller is going to take a big hit on his after tax proceeds if his business sale is concluded after November 1, 2010. Let’s look at a quick example. A 63 year old man started his business 25 years ago and he sells it for $5 million. All his equipment has depreciated so his basis is approximately $0. Under current tax laws he would have a $5 million capital gain from the sale of his business. His after tax proceeds would total $4,250,000.

If he sells after November 1, 2010, and the tax laws change as I am predicting. The same sale would net him $3,600,000. He lost $650,000 because of this change. If you wait until the actual change is voted into law, there will be a rush to the exits causing an unusually high number of businesses to be for sale. That would further reduce proceeds for the seller because of supply and demand pressures.

The most important tax issue, however, for the business seller continues to be the corporate structure (C Corp, S Corp, or LLC) and whether the business sale is an asset sale or a stock sale. First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10-year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.

Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.

Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.

This anticipated change to the capital gains tax rates will certainly add to the complexity of selling a business. I cannot stress how important a factor taxes will be in your successful business exit. Here is my summary checklist:

Tax Consideration Checklist

Get Good Advice on Original Corporate Structure

If C Corp – Retain Ownership of all Appreciating Assets Outside Corporation – i.e. Real Estate, Patents, Franchise Rights to avoid double taxation

Look at Deal Economics First, Taxes Second

Make Sure Your Transaction Support Team has Deal Experience

Before You Go To Market, Work With Your Team to Understand Deal Structure vs. After Tax Proceeds

You Have the Right to Pursue the Minimum Payment of Taxes – Exercise Your Rights

It Is Never as Effective as an Afterthought

The Pros Can Match Your Desired Outcomes With the Right Tools. Be aggressive in your tax positioning of your sale, both with the buyer in your negotiations and with your filing with the IRS. The various deal structure options are very important issues that need to be understood from a tax impact perspective. Remember that a deal term that is favorable to the buyer for tax treatment is correspondingly unfavorable to the seller. You can bet that the buyer’s team of advisors is well versed on this topic. Make sure that your team of advisors is equally well versed or you could end up with a much less than you thought in after tax proceeds.

Have you recently sold any of your rental property? Are the taxes on your capital gains are a burden for you? Are you looking for some way out to reduce these taxes and keep most of the profits you made from this transaction?

Then you need to know some intricacies of capital gains tax rules.

If you had purchased rental property at a lower price and now sold it with a respectable margin on it, this difference you could get is the capital gain and the same is taxable.

Remember, IRS gives preference to home owners. An average home owner will be charged leniently as compared to a property investor. So the capital gains tax varies as per different types on property owners.

One good thing about the capital gains tax is that it is lower than the income tax. It is convenient if you buy the property and wait for one year before you sell it. This way you will have to pay taxes at an average rate of 10 to 25 %. But if you plan to sell your rental property before one year, then your earning is considered as short term capital gains and you have to pay heavy taxes on it which may be same as the ordinary income tax.

If you have your rental property overseas, you need to check the capital gains taxes rules over there. As in some countries like United Kingdom to encourage foreign investors, they do not charge any tax from them for their capital gains.

Some proven tips for saving on this tax:

You can avail the benefits on tax savings by becoming a home owner than a property investor.

To qualify to the criteria of home owner, you have to stay in your rental property for a minimum of 2 years. You may have rented it in past  but then you have to stay in it for two years out of five years block before you sell off. Then it will be considered as your own home for tax purposes.

If you are a married couple selling your own home, the profit of first $500,000 is not taxable as against a sole owner who is eligible for tax exemption on the first $ 250,000.

If your sale is just a rollover, you may be charged absolutely nothing towards your capital gains. So you are selling your rental property only to purchase a new property of that type, it will be a rollover.

This rollover refers to section 1031 of the internal revenue code. To satisfy the clauses of this section you have to finalize on a new property within 45 days of the sale and the deal has to be completed within 6 months.

Remember, selling your rental property in cash emergencies is not a good idea. Then it is difficult to reduce the liability on capital gains. And this is the reason why I advise property owners to put aside some of your funds for emergencies such as major repairs.

If you have some money then you may have considered trying to make your fortune with stocks, bonds, and maybe even real estate.  The concept is to buy cheap and sell dear, since profit is the name of the game.  Before getting into it though, there is something you need to know.  These kinds of assets are taxable if a capital gain is made, and the associated tax is called a capital gains tax.

Capital gain means a net profit gained from selling non-inventory assets like real estate, stocks, and bonds.  If you bought any of these for price X and sell them for price Y, where Y is a positive value greater than X, then you have made a capital gain.  In the United States of America, this capital gain is subject to taxes, ranging from 5 to 15% based on your financial standing.  Put simply, you won’t get the whole 100% of your profit, since some of it will go towards paying taxes.

Taxes are all well and good, but sometimes one may feel that it is unfair.  After all, it was you who took all that risk in buying those assets and making them grow.  There is a solution with which you can get that whole 100% of your grown investments, if you were planning to use that amount to invest in something else.  This “solution” is called a 1031 exchange.

A 1031 exchange is called such because it is an exchange of assets as governed by the United States’ Internal Revenue Code section 1031.  Under this, like-kind similar-value assets may be exchanged with no capital gains tax levied against them.  Due to the definition of terms, a capital gain is not made unless an explicit sale is made.  Because assets are not sold and bought under a 1031 exchange, then technically no capital gain is made and thus no capital gains taxes apply.

As an example, take the following situation.  A man owns a house that he is currently renting out.  The house is in the suburbs, so it is not too pricey.  It is however, quite large and very well kept, so it has gained value under the ownership of that man.  One day, he takes a drive around the city and spots a building that would be suitable for turning into a boarding house for students.  It is not very large, but it is close to the good schools.  He asks for an appraisal and finds that it is valued at roughly the same amount as the house that he is renting out, if there are no losses due to tax.  He files for a 1031 exchange and trades his old property for the new one, deferring his capital gains tax.

Making the most of your investment usually means reinvesting in something else and letting it grow even more, while losing as little as possible. 1031 exchanges can make that happen.  If you are interested, you should seek the advice of a qualified tax practitioner, so you can get it clean and clear.

The Capital Gains Tax has always been a hefty portion of the equation when you invest in real estate.  Up until now, the benefits were generous for residents or investors who lived in their homes.  Now, however, the tables seem to be turning on the investors.

If you are a homeowner who lives in their primary residence for at least two years and you’re single, the capital gains allowance for you is $250,000.  If you are living under the same circumstances, but married, the same allowance is $500,000.  That has not changed.

Capital gains are assessed on the profit made when selling your house.  That is not, generally, equal to the amount of sale.

There has been a change in the law under circumstances where the owner purchased the home, and then rented it for a period of time before taking possession of it as their primary residence for at least two years.

It was once possible to sell the home under these circumstances and convert the profit from renting the home into a tax-free income under the capital gains protection.

Even though the owner has lived in the home as their primary residence for at least two years, as the tax law requires, the time during which it was rented is now considered a taxable period.  The new law states the capital gains allowance is to be tabulated pro-rata, and that it shall be divided between the time it was taxable (while it was rented) and the time it was not (while the owner lived there).

Let’s draw an example of how this works.  You buy a house in June of 2009 for $400,000.  You rent it for three years and then live in it for two before selling it in June of 2014 for $700,000.  So, you have a net gain of $300,000 for our example.  Under the prior set of tax laws, you could use your allowance as a single person to the tune of $250,000.  That means you would only have to pay tax on $50,000.

Under the new law, you can claim your capital gains allowance of $250,000, but only against two fifths of the $300,000 you made selling the property.  This means that your allowance covers only $120,000 of the money you got for selling the property.  That leaves you in the bucket for capital gains tax on the remaining $180,000

You are now going to pay capital gains tax on $180,000 as opposed to $50,000.  Some change, huh

Sooner or later, every American is bound to deal in real estate.  There comes the question of capital gains tax.  The Congress is determined to plug the loopholes in this area.  How is it going to affect you? Chintamani Abhyankar explains.