Next steps after selling a business

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jaymeetme
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Joined: Wed May 08, 2019 1:44 pm

Next steps after selling a business

Post by jaymeetme »

Hello All,

My father-in-law recently sold a motel they had in partnership. They owned the motel for about 5 years. They bought it for $400K and sold it for $585K.Now they are trying to figure out what should be their next steps. My FIL wants to defer paying taxes on the capital gain while the partner wants to pay taxes right now and cash out remaining. What options do my FIL have right now to defer paying taxes? Can they use this money towards down payment of their primary home? Appreciate if you can provide some suggestions on this.
BenjaminEsq
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Re: Next steps after selling a business

Post by BenjaminEsq »

Sorry to be "that guy" but this question is better suited for a tax attorney. By the looks of your question, I thought you were asking for investment advice (ie, where should I park the money, how should I handle a windfall). But after reading it, looks like you need tax advice.

To determine if he should pay down his primary home, there's a whole bucket of questions that need to be answered: does he plan to live in that home for the foreseeable future? does he continue to plan to work? what's his total annual income (include SS, dividends), annual burn rate, any upcoming expenses, etc?

The goal here would be to do tax and retirement planning with your tax attny or accountant. Figure out where he want's to be and work backwards. Determine all foreseeable income and expenses then build a rainy day fund just in case.
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JoeRetire
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Re: Next steps after selling a business

Post by JoeRetire »

jaymeetme wrote: ↑Mon Jul 26, 2021 12:57 pm My father-in-law recently sold a motel they had in partnership. They owned the motel for about 5 years. They bought it for $400K and sold it for $585K.Now they are trying to figure out what should be their next steps.
Seems like that should have been determined before deciding to sell.
My FIL wants to defer paying taxes on the capital gain while the partner wants to pay taxes right now and cash out remaining.
Again, seems like this should have been determined before deciding to sell.
Perhaps they need to consult their partnership's attorney and/or CPA.
Can they use this money towards down payment of their primary home?
If it's their money, they could use it anyway they choose. Unless I'm missing something here...?
I don't see how this defers any taxes though.
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Lee_WSP
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Re: Next steps after selling a business

Post by Lee_WSP »

The only way to defer the taxes is to not create a taxable event, ie don't sell.

But seriously, it's at most 23.8% of 1/2 of 185,000. It's not enough to bother with an installment loan which would create ordinary income on top of capital gains.

He has until the next quarterly payment is due to forward the correct amount of money to the IRS. See an accountant to calculate this correctly.
livesoft
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Re: Next steps after selling a business

Post by livesoft »

Lee_WSP wrote: ↑Mon Jul 26, 2021 3:46 pmHe has until the next quarterly payment is due to forward the correct amount of money to the IRS. See an accountant to calculate this correctly.
Perhaps true, but maybe FIL can qualify for a so-called "safe harbor" and not pay any penalty for paying the taxes as late as Friday April 15, 2022. Technically, that's a multi-month deferral, but perhaps not what the OP wishes.
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Lee_WSP
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Re: Next steps after selling a business

Post by Lee_WSP »

livesoft wrote: ↑Mon Jul 26, 2021 3:55 pm
Lee_WSP wrote: ↑Mon Jul 26, 2021 3:46 pmHe has until the next quarterly payment is due to forward the correct amount of money to the IRS. See an accountant to calculate this correctly.
Perhaps true, but maybe FIL can qualify for a so-called "safe harbor" and not pay any penalty for paying the taxes as late as Friday April 15, 2022. Technically, that's a multi-month deferral, but perhaps not what the OP wishes.
Yes, the correct amount could very well be zero, but it might not be, I do not wish to opine one way or the other.
smitcat
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Re: Next steps after selling a business

Post by smitcat »

jaymeetme wrote: ↑Mon Jul 26, 2021 12:57 pm Hello All,

My father-in-law recently sold a motel they had in partnership. They owned the motel for about 5 years. They bought it for $400K and sold it for $585K.Now they are trying to figure out what should be their next steps. My FIL wants to defer paying taxes on the capital gain while the partner wants to pay taxes right now and cash out remaining. What options do my FIL have right now to defer paying taxes? Can they use this money towards down payment of their primary home? Appreciate if you can provide some suggestions on this.
You will need your accountant to help with this one - after 5 years of returns you have a lot of missing information. Each year there was a statement which will be needed to determine what if any taxes are due.
I can guarantee you it is not $585 - $400 = $185K.
Rudedog
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Re: Next steps after selling a business

Post by Rudedog »

They probably took a significant amount of tax depreciation over the years, you need to have your accountant determine the tax basis of the property at the time of sale and the gain on the sale. If seller received the cash in 2021, no way to defer the tax. Sounds like there is a lot more information needed.
orangetele
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Re: Next steps after selling a business

Post by orangetele »

Wouldn't the only way of not paying taxes be a 1031 or QOZ investment? 1031 would require rolling it into another like-for-like property, which I don't think he's willing to do.
Topic Author
jaymeetme
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Re: Next steps after selling a business

Post by jaymeetme »

Okay thank you everyone for your response. I will ask him to get in touch with his CPA/Attorney with all this info. He was going to do it anyways but I wanted him to have more information on hand before the meeting.
SubPar
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Re: Next steps after selling a business

Post by SubPar »

Ship's already left the port on a 1031. Can't take possession of sale proceeds and you would've needed to engage a QI some time ago.

Opportunity zone investment is probably about the only way to defer recognition of the gain (until tax year 2026) at this point. And that option is certainly not for everyone.
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