Every business will sell assets at some stage. Whether the item you’re parting with is a piece of property or equipment, being able to minimize the tax liability will help you save money.
Reducing your tax liability when selling assets
There are a number of tax regulatory duties that come into play when selling assets. We take a look at some of them, and delve into whether they present possible ways of reducing your liability.
1. Strategize to reduce capital gains tax
When you sell an asset, you will be subject to capital gains tax on any profit that you make from the sale. The amount of tax you pay will depend on how long you held the asset and the tax bracket you are in. If you held the asset for more than a year, it will be subject to long-term capital gains tax, which is typically lower than short-term capital gains tax.
You can minimize your capital gains tax liability by strategically timing the sale of your investments and using tax-advantaged investment vehicles, or tax-loss harvesting – the process of balancing capital losses with gains by, for example, selling investments that have decreased in value and using those losses to offset capital gains. It is recommended that you consult with a tax professional to advise you.
2. Calculate the cost basis of your asset
Cost basis is used to calculate capital gains taxes as it refers to the original price you paid for the asset as well as any additional costs incurred during its purchase such as commissions, fees, and taxes.
When you sell the asset you may subtract the cost basis amount from the final resale price. If the sale price is less than the cost basis, you may be able to deduct the loss on your tax return.
3. Utilize tax-deferred accounts
If you have tax-deferred accounts such as a 401(k) or IRA, you may be able to sell assets within these accounts without paying taxes on the gains. Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until you make a withdrawal from your IRA. This then could be an avenue to explore to reduce the immediate tax liability of selling an asset. But, with this option, it is crucial to consult with your CPA to take into account whether immediate taxation, outside of the deferred tax account environment, may be less than the deferred tax option – there may be a number of factors to consider with this option to confirm that it is viable.
4. Explore possible tax reduction through 1031 exchanges
A 1031 exchange allows you to defer capital gains tax on the sale of a property by reinvesting the proceeds into a similar property. Utilizing a 1031 exchange is a strategic way to invest in a property with the potential to receive a better profitable return on your investment than the property you want to relinquish.
This can be a powerful strategy for reducing your tax liability and maximizing your returns, but it is important to follow the strict rules and regulations governing 1031 exchanges.
Reducing your tax liability when selling an asset requires careful planning and a thorough understanding of tax laws and regulations. It is important to plan ahead when working on ways to reduce your tax liability. Consult with your CPA when planning to sell an asset so that they can look into your holistic finance portfolio and develop a strategy that takes advantage of all available tax deductions and credits.
At Fusion CPA, we can help you manage your financial portfolio and help your business plan and implement a specialized tax-saving strategy. Contact us for a consult today.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
