Explore Unique Tax-Saving Strategies
As a manufactured home community owner, the decision to sell can be fraught with uncertainty, especially when it comes to tax implications. In today’s market, you might be wondering, “Where does my money go?” For those who have been operating for decades, this question is even more pressing.
But there are ways to improve financial outcomes when selling, by minimizing capital gains taxes and maximizing liquid assets to invest.
Understanding Tax Deferral Strategies: Exchange or Installment Sale
When selling a manufactured home community, the tax codes offer planning options that can significantly reduce out-of-pocket expenses, such as capital gains taxes. Two key strategies include tax-deferred exchanges and installment sales.
A tax-deferred exchange involves purchasing a new property of equal or greater value than the property being sold. This postpones the capital gains taxes the seller would have otherwise paid. However, this option may not be ideal for those looking to retire and divest from property ownership.
An installment sale is a contract that allows the seller to defer taxes for decades. This option allows for a tax-free lump sum that is nearly equivalent to the sale proceeds, with no qualification on how it may be reinvested.
The Power of Choice: Exploring Real-World Examples
Bruce Jones is the founder and CEO of TaxWealth, a California-based tax analysis and solutions research company that helps its clients solve capital gains and other tax problems by using tax deferral and other planning methods.
“Property and business owners are often surprised to learn that their tax obligation when they decide to sell may be even higher than the current 20 percent federal capital gains tax and the state tax rate they would also have to pay,” Jones said. “Manufactured home community owners can benefit greatly from tax deferral strategies like exchanges or installment sales to address their tax obligations and achieve their financial goals. Understanding all the options and the potential tax implications when selling a property is crucial. The good news is that they have choices.”
For instance, a California property owner who had a $10 million property with a taxable gain of $7.5 million would face $2.8 million in capital gains taxes. If they opted for a conventional sale, they would receive $2.7 million after paying off the debt and taxes. But by using a tax deferral planning approach, the property owner was able to pay off the debt at the time of the sale, defer taxes for decades, and receive $5.5 million tax-free to reinvest.
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