As an investor or business owner, you want to maximize the value of your asset sales while minimizing their tax burden. Just as an archer carefully selects the right arrows for their target, you as the investor have multiple tax-efficient strategies that may help you reach a better tax outcome and may help you achieve your financial goals. When planning to sell your business, real estate, or other highly appreciated asset, taxes can significantly impact your final returns. Remember, it’s not what you make; it’s what you keep. With proper planning and the right approach, we can explore a variety of strategies to help you keep more of what you have earned. Additionally, it’s worth noting that many of these strategies may be paired with one another. I want to share seven powerful tax strategies (plus one bonus) that could benefit you during your sale. Each approach offers unique advantages, and you can work together with your tax and legal professionals to determine which combination might best suit your specific situation. In today’s article we will be touching briefly on each of these strategies. In subsequent weeks, we will be exploring each of these strategies in-depth: both the benefits and limitations of each of these strategies.

Arrow No. 1: Delaware Statutory Trusts (DSTs)

Delaware Statutory Trusts can be particularly beneficial when diversifying your real estate investments while potentially deferring taxes through a 1031 exchange. DSTs allow you to invest passively in large-scale real estate properties, making them ideal for those who want exposure to real estate without the burden of direct property management. Potential Benefits of DSTs:

1. Fractional Ownership: Allows passive investment in large real estate properties.
2. Tax Deferral: Potentially defer capital gains taxes through a 1031 exchange.
3. Diversification: Can spread investments across multiple properties and locations.
4. Potential for Passive Income: May generate passive income streams, allowing you to benefit from real estate income without active involvement in property management.
   
5. Tax Advantages: Access the same tax advantages obtained through fee simple ownership of investment real estate, including both the qualified business income deduction and depreciation deduction.

Arrow No. 2: Charitable Remainder Trust (CRT)

A Charitable Remainder Trust allows you to donate your assets to a charitable trust, providing tax benefits while seeking to secure an income stream and a charitable gift. Key Benefits of a CRT:

1. Potential to Reduce Capital Gains: Eliminate the capital gains tax at the point of sale.
2. Income Replacement: Create an income stream to replace income lost from the asset’s sale.
3. Return on Deferred Taxes: Potentially earn a return on the taxes you did not give the IRS at the point of sale.
4. Immediate Tax Deduction: Receive a tax deduction in the year the trust is funded.
5. May Retain Up to 90% of the Asset’s Value: Receive up to 90% of the asset back during your lifetime.
6. Estate Tax Reduction: Remove the assets from your estate.
7. Charitable Contributions: Support a Donor-Advised Fund (DAF) or charity of choice.

Arrow No. 3: Intermediated Installment Sale

The Intermediated Installment Sale is an advanced tax strategy that allows you to defer capital gains taxes while earning a return on the tax that would otherwise be paid to the IRS. Often referred to as the Installment Sale Method, it has its statutory basis under IRC 453. The legal theory is that a trust is used as an intermediary, mitigating the risk of you holding a note from the buyer. Potential Benefits of the Intermediated Installment Sale:

1. Tax Deferral: Defer the taxes for up to 20 years.
2. Returns Arbitrage: Earn a return on deferred taxes not paid to the IRS, which may provide additional income over time.
3. Income Replacement: Replace income lost from the asset’s sale.
4. Inflation Advantage: Use inflation to your advantage.
   
5. Diversification: Create a diverse portfolio upon the sale of the asset, creating both an income stream and the potential for principal growth, while also greatly reducing asset specific risk.

My firm can help you understand this program’s benefits and risks, including sequence risk, possibly paying the tax at a higher later capital gains rate, and legislative and IRS uncertainty.

Arrow No. 4: Donor-Advised Fund (DAF)

A Donor-Advised Fund allows the charitably inclined to maximize their tax deductions by “bunching” multiple years of donations into one year. For example, let us hypothetically assume you typically contribute $50,000 annually to various charities and sell your asset for $5 million. You can fund a DAF with $500,000, equivalent to ten years of charitable giving. This creates an immediate tax deduction, helping offset the sales tax burden. Remember, you control all your charitable donations when using a Donor-Advised Fund.

Arrow No. 5: Qualified Opportunity Zone (QOZ)

Investing in Qualified Opportunity Zones can provide potentially significant tax incentives for selling assets with capital gains while contributing to the development of economically distressed communities. Potential Benefits of QOZ Investments:

1. Deferral of Capital Gains: Capital gains tax on the sale of assets can be deferred until December 31, 2026, if reinvested in a QOZ.
2. Reduction of Capital Gains: If the QOZ investment is held for at least five years, investors can exclude 10% of the deferred gain. If held for seven years, 15% of the gain can be excluded.
3. Tax-Free Growth: If the investment in the QOZ is held for more than ten years, any additional gains on the QOZ investment itself can be excluded from capital gains taxes.

Arrow No. 6: Investments in Oil and Gas Exploration

Investing in oil and gas exploration offers substantial tax advantages, particularly in high-income years. Depending on the nature of the deal, you can generally deduct up to 90% of the investment, making it an attractive option for those facing a large tax bill.

Arrow No. 7: Pay the Tax

While not always the most tax-efficient option, sometimes you may prefer to pay the tax and move on with your life. Paying the tax outright remains an option for those who do not want to use more complex tax efficient strategies. In some cases, you can work with your tax professional to pair the sale of the appreciated asset with tax loss harvesting or a cost segregation study to mitigate the tax liability.

Bonus Arrow No. 8: Pre-Sale Trust Strategies

Proactive planning well before selling the asset could reap potentially significant benefits if you plan to sell your business or real estate in the coming years. My firm can help you explore different trust strategies that have the potential to offer substantial benefits:

• Early implementation: Establish trusts well before the sale to maximize potential tax benefits.
• Potential income tax reduction: In states with income and capital gains tax, there could be a reduction in your annual tax bill.
• Estate tax mitigation: Properly structured trusts can remove assets from the taxable estate, potentially reducing future estate taxes.
• Gift value discounting: Some trust structures allow for discounting the value of the gifted asset, effectively stretching the lifetime gift tax exemption further.
• Enhanced capital gains tax flexibility: Certain trust arrangements may offer opportunities to reduce or defer more capital gains when the asset is ultimately sold.
• Strategic Planning: We can better design a holistic strategic plan for you and your family by addressing these issues early.

Closing Thoughts

These tax strategies represent a comprehensive approach to protecting and maximizing the value of your sale. It is important to note that successful implementation of these strategies often requires careful planning and adequate time for proper execution. The earlier you begin the planning process, the more options will be available. The sale of your business or real estate represents a significant milestone, and you should take the time to put yourself in a position to achieve the most favorable outcome that aligns with your goals and objectives.

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. DST 1031 Exchanges are complex investment strategies subject to specific IRS regulations under Section 1031 of the Internal Revenue Code.

McKeon Financial was established in 2004, specializing in a wide range of alternative investments. We are focused on retirement planning, wealth accumulation, insurance protection, and estate and legacy planning. When consulting, educating, and initiating tax savings strategies, we work closely with our clients’ tax and legal professionals. McKeon Financial offers securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. McKeon Financial and IFG are unaffiliated entities. If you have questions regarding the material presented, please don’t hesitate to contact us: 360-652-4244 or info@mckeonfinancial.com.