As a business owner, real estate investor, or owner of highly appreciated assets, you wouldn’t be where you are today without ambition, a strong work ethic, and a do-it-yourself attitude. You aren’t afraid to tackle new challenges and do what needs to be done. However, you also got to where you are because you are smart, and you know that some tasks are better for professionals. You know when you need to hire an electrician or a plumber, and you probably don’t try to tailor your own clothes.
Capital gains tax planning is another area where hiring a professional is an investment that will pay off in the long run. If any of the following seven categories apply to you, it’s time to reach out to a capital gains tax advisor and see how they can help you make the most of your investments.
1. You Have Appreciated Assets Worth Over $1 Million
The IRS levies capital gains taxes on the profit made when you sell an appreciated asset. If you bought Bitcoin for $10,000 in 2014 and it is now worth $1.5 million, you would owe capital gain taxes on $1.4 million when you sell.
Capital gain taxes can be as high as 33%, depending on where you live and your income bracket. For investment income over $250,000, the IRS levies an additional 3.8% tax called the Net Investment Income Tax (NIIT). So, if you live in California, you will owe around $51,500 to Uncle Sam when you sell.
You don’t have to pay it all right now, though. With the help of a tax advisor and tax planning strategies, it is possible to defer and reduce your capital gains taxes and still maximize the returns on your investment. When your capital gains tax liability is in the tens of thousands of dollars, it is worth the investment to work with a tax professional.
2. You Own a Business or Investment Property
If you own a business, you have more than a full plate managing the day-to-day operations. You are shouldering the physical and mental workload of managing inventory, staffing, marketing, and customer service.
The same is true if you are actively managing investment properties. Even if you have outsourced repairs, landscaping, and renter management to a property manager, your skill set, and time are best used in managing your assets and building your portfolio.
Business owners, landlords, and entrepreneurs tend to be independent, capable, and driven. You might be tempted to think you can tackle your capital gains taxes alone. However, tax laws and strategies, particularly when selling a business or investment property, are complicated and change frequently. You have the best chance of maximizing your returns when you hire a capital gains tax advisor.
3. You Are Selling a Short-Term Investment
The federal government categorizes capital gains as short-term and long-term, subject to short-term and long-term taxes. If you sell an asset you have held for less than a year, you will be subject to short-term capital gains taxes. This tax rate is the same as your income tax rate. At the federal level (not including state taxes), the top income tax bracket is at 37%. Long-term capital gains are taxed at a much lower rate than short-term gains. The top rate for long-term capital gains is 20%.
To avoid the very steep taxes on short-term gains, you will need the help of a tax advisor and some creative tax strategies that might include offsetting losses, tax deductions, or charitable contributions. A tax advisor can also help you consider deferral strategies such as a 1031 exchange for real estate or a Deferred Sales Trust. By deferring your taxes, you may be able to avoid the steeper short-term taxes and lower your overall tax burden.
4. You Want to Move from an Active to a Passive Income Stream
If you have spent the better part of your working career actively managing real estate or investments, you might be ready to retire to a more hands-off approach. When you are ready to reinvest your assets into a passive income vehicle, you will want to maximize the funds you have available.
Traditionally, you might sell your appreciated asset–such as a business or apartment complex–lose at least 20% of your profits to capital gains taxes and then reinvest the remaining 80% so you can start living off of your passive income stream. A capital gains tax advisor can help you do more with your money.
Using a Deferred Sales Trust, you could sell your asset to a trust, which gives you a promissory note outlining the repayment plan in return. You won’t owe any taxes immediately, and the trust can reinvest 100% of your profits into your chosen investments, significantly increasing your returns. You won’t owe any taxes until you receive your regularly structured payments from the trust.
5. You Feel Trapped Trying to Make 1031 Exchanges Work
If you have been in the investment real estate business for a while, you are probably familiar with the 1031 exchange. It can be a powerful tool for deferring capital gains taxes and getting the most out of your investments. However, I’m sure you also know its many restrictions and limitations. Finding an appropriate replacement property can be difficult, especially in the narrow 180-day window. Many investors take on increasing debt as they move from property to property. When you work with a qualified capital gains tax advisor, they can point you to other tax deferral strategies that give you more freedom and flexibility.
When you use a Deferred Sales Trust, you can access the same tax deferral benefits without the like-kind restrictions and timing requirements. This gives you the freedom to move out of real estate if you choose or to stay in real estate and practice optimal timing. You can sell when the market is high and then wait for an opportune time to buy again.
6. You Are Tired of Paying High Taxes on Investments
As we mentioned before, between federal capital gains taxes, state taxes, and the NIIT, the tax burden on highly appreciated investments adds up quickly. Maybe you’ve been trying all the traditional methods to reduce your tax liability–offsetting losses, standard deductions, business deductions, charitable donations, and holding your assets for at least a year–but you still feel overwhelmed with high taxes. If that’s the case, it sounds like you need advice from a capital gains tax expert.
A capital gains tax advisor will help you harness the power of creative tax strategies that are both legal and effective. Where you see tax challenges, they see opportunities for you to make the most of your hard-earned investments.
7. You are Putting Your Estate in Order
Whether you are getting ready to retire or preparing to leave a legacy for your children and heirs, you would benefit from professional help. The tax rules surrounding estate planning and inheritance can be even harder to navigate than capital gains taxes. Estate tax planning for high-net-worth individuals is essential.
Without planning, your heirs may owe both capital gains and estate taxes on your assets after you die. Estate taxes alone can be upwards of 40%. A well-structured estate plan will allow your heirs to avoid the lengthy probate process, reduce conflicts between your beneficiaries, and minimize the taxes your heirs owe on your assets. To create a legal and effective estate plan, you will need a tax advisor and a tax attorney.
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Infographic
Hiring a professional for capital gains tax planning is a wise investment that pays off in the long run. Discover why it’s time to consult a capital gains tax advisor and how they can help maximize your investments in this infographic.
