As an investor, you’re all too familiar with the way in which capital gains taxes can eat up a substantial portion of your profit when you sell a highly appreciated asset. To review, today’s federal long-term capital gains rates are as follows:
- 0% if you have an annual income of up to $40,000 and file as an individual
- 0% if you have an annual income of up to $80,000 and file jointly with your spouse
- 15% if you have an annual income of $40,001-$441,450 and file as an individual
- 15% if you have an annual income of $80,001-$496.600 and file jointly with your spouse
- 20% if you have an annual income of $441,451 or more and file as an individual
- 20% if you have an annual income of $496,601 or more and file jointly with your spouse
And don’t forget the 3.8% Medicare tax.
As if this weren’t bad enough, the majority of states assess their own taxes. The rates range from 2.9% in North Dakota to 13.3% in California. Only the following states impose no state income taxes or capital gains tax when you sell appreciated property:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
How Much Difference Does it Make?
To see how much difference a state capital gains tax can make in the amount of sale proceeds you get to keep, let’s compare a married couple’s sale of their highly appreciated business in two states: California and Florida. For purposes of this hypothetical, assume the following for both sales:
- $10 million sale proceeds after commissions and closing costs
- $1 million seller’s original basis
- $500,000 business loan balance at time of sale
- $9 million consequent taxable gain
- 20% federal capital gains tax rate
- 3.8% Medicare tax rate
Without any tax planning whatsoever, the Florida couple (0% state capital gains tax) will pay $2.142 million in taxes, leaving them with $7.358 million in net proceeds to reinvest. The California couple (13.3% state capital gains tax), however, will pay $3.339 million in taxes, leaving them with only $6.161 million in net proceeds to reinvest. In other words, California’s tax makes a difference of $1.197 million.
The DST Advantage
Short of making sure you never own any investment assets in a state that imposes its own capital gains tax, is there any way you can level the playing field? Yes, there is. It’s called the Deferred Sales Trust. This unique proprietary version of an installment sale allows you to defer both federal and state capital gains taxes. Therefore, using the same hypothetical sale, basis and business loan balance figures as above, a DST gives you your full $9.5 million net proceeds to reinvest as you wish, no matter what state your sale takes place in.
In addition, you need not invest in another business when you use the DST as a strategy for selling your highly appreciated business. In fact, you can instruct your Independent Certified DST Trustee to make virtually any type of investment on your behalf that you wish, including such things as stocks, bonds, real estate, annuities, life insurance, etc. Furthermore, you control both the timing and the amount of your DST installment payments, paying capital gains on only the amount of long-term capital gains each payment represents.
Intrigued? Find Out More
Request a consultation with a Reef Point Certified DST Trustee today to learn how the Deferred Sales Trust can make the sale of your highly appreciated asset a financial win-win for you.