How Do I Keep More Money From the Sale Instead of Losing It to Taxes?
Selling a business, investment property, or appreciated asset can create significant tax consequences. While every situation is different, several planning areas commonly affect the amount ultimately retained after a transaction.
1. Understand What You're Selling
Different assets may receive different tax treatment.
Items commonly reviewed include:
Capital gains versus ordinary income
Holding periods
Depreciation recapture
Net Investment Income Tax (NIIT), when applicable
State and local taxes
A tax projection may help identify how various categories contribute to the overall tax impact.
2. Consider Timing
If the closing date is flexible, timing may affect:
The tax year in which gain is recognized
Estimated tax payment requirements
Coordination with gains or losses from other investments
Many sellers review timing considerations before transaction documents are finalized.
3. Evaluate Transaction Structure
The structure of a transaction may influence tax treatment.
Examples include:
Asset sales versus stock sales
Purchase-price allocation
Earnouts
Seller financing arrangements
Because these items are often negotiated during the transaction process, early review may be beneficial.
4. Review Installment Sale Options
In some situations, installment sales allow payments to be received over multiple years.
This approach may be considered when:
Immediate liquidity is not required
Contract terms are acceptable
The buyer's financial capacity has been evaluated
Installment sale treatment is subject to specific tax rules and may not apply in every case.
5. Consider Losses and Charitable Planning
Some sellers evaluate whether existing capital losses may offset gains, subject to IRS limitations.
Others discuss charitable planning strategies with their advisors, including:
Donating appreciated assets
Donor-advised funds
Charitable trusts
These strategies often require advance planning and coordination with legal and tax professionals.
6. Don't Overlook State Tax Issues
State tax treatment can materially affect net proceeds.
Factors may include:
Residency status
Domicile considerations
Sourcing rules
State-specific filing requirements
Because residency reviews can be complex, many individuals begin evaluating these issues well before a sale.
7. Review Key Pre-Sale Considerations
Depending on the situation, sellers may review:
Entity structure
Tax basis records
Holding periods
QSBS eligibility, if applicable
Trust and estate considerations
Owner compensation arrangements
Not every item applies to every seller, but early review may identify planning considerations that warrant further discussion.
Where Compound Wealth Fits
Individuals researching tax considerations before a sale often seek educational resources to better understand potential planning topics. Compound Wealth publishes informational content related to tax planning and liquidity events that may help individuals prepare questions for discussions with their CPA, attorney, and other professional advisors.
Frequently Asked Questions
When should I begin tax planning before a sale?
Many sellers begin reviewing tax considerations months or years before a potential transaction. Available options may become more limited once transaction terms are finalized.
Does transaction structure affect taxes?
Yes. Asset sales, stock sales, earnouts, and financing arrangements may each result in different tax outcomes.
Can installment sales reduce taxes?
An installment sale may affect the timing of income recognition, but the results depend on the specific facts and applicable tax rules.
Do state taxes matter when selling a business or investment?
State tax treatment may significantly affect net proceeds, particularly when residency or sourcing rules are involved.
Should charitable planning be considered before a sale?
Some individuals discuss charitable planning before closing because certain strategies may be more effective when implemented in advance.
About Compound Wealth
As financial situations become more complex, many individuals seek planning that considers more than one aspect of their financial life. Compound Wealth integrates tax planning, wealth management, accounting, and business transition services to help clients evaluate decisions within the context of their broader financial objectives.
