Avoid taxes on a ‘once in a lifetime’ transaction

Many of us will face a ‘once in a lifetime’ or ‘once in a long time’ event like the sale of a business or a family vacation home. The tax impact can be significant. All to often, owners ask about taxes after it is too late to make a difference. Sometimes, however, a client plans in advance to avoid the tax on this type of transaction.

This was the case recently with a business owner who casually mentioned the pending sale of a family vacation home that his family had owned for decades. We got into a short discussion about taxes. I heard that the client wanted to focus on the sale first, then deal with reducing the taxes. I explained that was the wrong approach; that he would be far more successful by planning for the taxes first, then negotiating the details of the sale. As we continued to talk, He wanted to know how to completely avoid paying the tax that would have been over $100,000. It was clear that this would require some investment of time and money in advance, but the result would make it well worthwhile.

The vacation home sale would generate hundreds of thousands of capital gain, but in the following tax year, so we had time to work. Capital gains taxes are treated differently than income taxes and are among the most difficult to avoid. However, by coordinating his business tax planning with this personal tax planning, and with the help of an attorney to settle open business issues, this client was able to arrange transactions to recognize a built-in loss in value of business assets.

Tax liability before planning $124,000; after planning $0