Capital Gains and Accelerated Depreciation: A Tax Love Story
Defer, defer, defer!
That seems to be the chant of the modern-day investor, and I’m not arguing the math behind the concept. What I am arguing is that you should be spending a good amount of time researching and preparing for HOW you plan to deal with the tax monster you are building in your financial plan!
Our go-to process for having this conversation with our clients, whose assets are heavily weighted in qualified accounts, is to walk through our Roth Conversion calculator. Nothing brain bending -- we simply show how living on a combination of tax-free income and passive income drops them to the bottom of the tax bracket in that year. And if you ever find yourself temporarily in the lowest tax brackets, wouldn’t that be a good time to convert your pretax money to post tax money? (The answer is often yes!)
If you retired at the top end of the 24% federal tax bracket and all of a sudden found out you could live for five years without filing a single dollar as ordinary income, how would that impact your retirement? Do you think you might say, “Excuse me, Uncle Sam? I’m going to take some future dollars that would likely be taxed at that 24% rate and pay my low tax on it now.”
Not a bad idea.
So how does this tie into our conversation with The BoaVida Group?
The above scenario addresses ordinary income issues. What about real estate or selling a business? The typical response to selling real estate is to do a 1031 exchange, roll the equity into a like kind asset, and keep the real estate investing train chugging along but at some point…YOU MAY WANT OUT!
When one of our clients introduced us to Eli and explained how he had solved the passive income tax issue for him, the light went on, clouds parted, angelic voices sang, and we were super thankful to book him on our podcast.
If you already listened to our episode, “Three Ingredients in Making an Entrepreneur: Mambas, Mistletoe, and Moons Over My Hammy,” then you already know Eli Weiner is all about that trailer park and RV park investing! So how did a trailer park investment help our client with his tax issues?
Before I run through the numbers, please, just stop here and go listen to the episode. It will probably be MUCH clearer!
Assets depreciate. Depreciation is just a part of life. Capitalizing depreciation is also a part of offsetting gains.
Now not everything depreciates at the same rate. Some things depreciate at a 39-year schedule, some 27-year schedule, some on a 20-year schedule, and so on. Well in 2017, the updated tax code put a provision that any assets on a 20-year depreciation schedule should be accelerated to year one! And guess what happens to have a large chunk of assets that fall under a 20-year depreciation schedule? That’s right, mobile home and RV parks!
So where does the magic come in?
In our episode we walk through an example client who wants out of an asset or business, but the sale would bring about a hefty tax bill. While the typical person thinks he has to decide whether to pay the tax or defer, Eli has just introduced a third option: claim the capital gains and invest enough in something where the 20 years of accelerated depreciation can be claimed in year one, effectively nulling out (or close to) your gain claimed.
I’m sure the light went on -- but it may be a dim, flickering light.
This is also the point at which we tell our clients, “I am not the accelerated depreciation strategist guy, but I can absolutely get you in touch with one!”
We have seen real stories of this radically changing people’s balance sheets. The sale of a business where the business owner was going to owe $350,000 in taxes, all of a sudden realizing that there’s a scenario where he sells a business, claims the $350,000 in capital gains, but then takes a loss of roughly the same amount in the same year. The assets used to claim the loss eventually get returned over time - he is whole again, and was able to keep more from the sale of his business.
I cannot stress this enough: strategies like this need careful supervision and input from advisors, CPAs, etc. When done correctly, this could be amazing, but it MUST be done correctly!
This strategy is semi-limited as the tax code is ever changing so we suggest you subscribe and listen to our podcast episode, “Capital Gains and Accelerated Depreciation: A Tax Love Story” today!
Kingsview Wealth Management does not provide tax, legal or accounting advice. The information was prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.