One of the many reasons I look forward to receiving this publication every month is the opportunity to learn from the experience of others. Experience may be a great teacher but the lessons learned can cost an arm and a leg. By comparison, reading how someone faced and overcame challenges, and then possibly applying those lessons to my circumstance costs nothing. This month’s column will provide information about some of the many steps necessary to increase the likelihood of achieving a successful retirement. What constitutes a “successful retirement” will vary from person to person, but my idea of a successful retirement is one in which I replace my current income with passive income, provide generational wealth for my children, and defer capital gains taxes. And while your definition may be different than mine, there are some foundational principles that shop owners routinely miss that can compromise the retirement they want. There’s an old adage which is true: people don’t plan to fail, they fail to plan.
One of the most important steps in the process is identifying what your tangible assets are. The business property, any additional business assets that are saleable, or even the brand you have created throughout the years. Anything and everything that may have monetary value. Understanding the tax code and tax implications and obligations that will come from the sale of these assets is a relevant step in the process. Many people hire experts in the field to assist, like commercial property agents and legal professionals, both for taxes and real estate. In addition, there are specialized auction companies to assist in the sale of equipment and other shop assets.
A common strategy is to defer capital gains taxes on the sale of real estate. Shop owners that own the property they operate on, and choose to sell it, use the formula of a 1031 exchange. This tax provision allows you to sell your property and invest in one of similar purpose, allowing you to defer capital gains taxes, and collect the rent or “mailbox money” from the new property. However, when the sale of the property happens, the funds must be held by a qualified intermediary, that is, in escrow by a third party. This entire process has two important dates within the timeline. The first is the 45-day rule, which mandates that the replacement property be identified by you once the actual funds of your sale are in escrow. The IRS allows for you to designate up to three different potential properties as long as you close on one of them. Closing is precisely the second rule of the timeline, the 180-day rule, which requires that you close on a property within 180 days from having received the funds into escrow. Once you go through with the purchase, you have effectively delayed capital gains taxation. However, this is not the only option, tax harvesting, A Delaware Statutory Trust, or investing in a Qualified Opportunity Zone can also be ways of setting up a comfortable retirement four yourself, and making sure you leave something behind for next generations.
