Different sales, same question: what do I keep?
A business, a farm or ranch, and a commercial building each create a different mix of gain, recapture and timing. Here is what tends to matter most.
Selling your business
How the price is split across goodwill, equipment, inventory and a non-compete changes the tax more than most owners expect. Equipment recapture is ordinary income in the year of sale, even on an installment sale.
- Allocation: the purchase price allocation decides how much is capital gain and how much is ordinary income.
- Seller financing: a seller-financed note spreads the gain as payments arrive. Protect it with a down payment, a security interest, a personal guarantee from the buyer's owners and tight note terms.
- Earn-outs: an earn-out is a contingent installment sale with its own rules.
- Personal goodwill: in a C corporation sale, selling personal goodwill directly can avoid a second layer of tax when the facts support it.
- The year after: a big sale year can raise Medicare premiums two years later and change how Social Security is taxed.
Selling a farm or ranch
Farmland is often held for decades with a very low basis, so most of the price is gain. That makes the one-year hit unusually large and spreading it unusually valuable.
- No $5 million interest charge: installment notes above $5 million normally carry an interest charge under Section 453A. Property used in the business of farming is exempt under Section 453A(b)(3), so a large farm sale can be seller financed without it.
- Land, buildings and equipment are taxed differently. The analysis separates them.
- Family and heirs: selling now, later, or holding for a step-up at death each lead to a different number. See also special use valuation.
- State rules: some states have farm-specific capital gain rules. See the variables.
What to know
The farm exception depends on how the property was used. Land rented out by someone who no longer farms it may be treated differently, so have your CPA confirm before relying on it.
Selling commercial or investment real estate
Years of depreciation mean part of the gain is taxed at up to 25% as unrecaptured Section 1250 gain, on top of the capital gains rate. A 1031 exchange defers it if you want to stay in real estate.
- 1031 or cash out: compare a full 1031 exchange, a partial exchange with boot, and an installment sale.
- Delaware statutory trust: a passive 1031 replacement, weighed like any other.
- Stuck rental losses: suspended passive losses are released when you sell your entire interest. See loss harvesting.
- Cost segregation: cost seg can turn part of the gain into ordinary recapture at sale.
Know your number before you sign.
The Big Sale Tax Analysis is a flat $5,000. Start with a free scoping call; you are invoiced only after it, and only if you go ahead.
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