Why Sell Your Business Now - Capital Gains Update
Capital gains taxes are assessed on assets that are sold at a profit. While this is often associated with stocks, it can also apply to the sale of real estate, a business and other types of assets. Capital gains taxes are applied only to realized gains from the sale of the assets. We’ve talked about this before but here is another update. Read the entire article here, but we will provide you with some key takeaways from the article in this post.
If you are thinking about selling your business, consider selling now rather than in the future, here’s a few reasons why.
First capital gains taxes face an increase from 20% to 39.6% -- that’s a 98% increase.
The Biden Administration has proposed requiring a gain to be recognized on the assets at the time of death. The increased capital gains rate would reduce the number of gains that a wealthy investor would be able to keep from selling an asset. Under the current rules, a $100,000 long-term capital gain would face a $23,800 tax bill at the federal level. With the proposed rates under the Biden tax plan, the taxes on this gain would jump to $43,400 for those above the income threshold. For a wealthy investor realizing gains on several holdings during a year, the increase in capital gains taxes could be significant.
Ordinary Americans may also find themselves affected in a number of ways. First, if these rules are enacted, some experts say it could trigger a selloff in the stock market. While this would likely be short-term in nature, the portfolios of most investors could take a hit, including 401(k) plans and other investments.
Owners of small to midsize businesses could also be affected.
The impact could be twofold. First, small-business owners who sell their business for a price that pushes their income for the year over the $1 million threshold could see any capital gains on the sale of the business taxed at the new, higher rates. Second, if a business owner dies and wants to pass the business on to their heirs, the value of the transaction could exceed the threshold where the heirs would be eligible for a step-up in basis on the value of the business. Based on an Ernst & Young study, this could have a negative impact on the heirs, the business, and the economy as a whole, depending upon which version of the repeal of the step-up in basis is enacted.
Another area where the proposed capital gains tax changes could affect ordinary Americans is when selling a home. For sellers of a primary residence, there is an exemption before any gains on the sale are taxed — $250,000 for an individual or $500,000 for a married couple. The rules state that the seller must have lived in the home for at least two of the five years prior to sale to qualify for this exemption, though there are some exceptions to this rule.
Key Takeaways:
The Biden proposal would raise the capital gains tax rate on those earning more than $1 million.
It would also eliminate the step-up in basis for larger estates, potentially causing heirs to incur significant capital gains taxes.
Ordinary Americans could see an impact from the proposed changes in the capital gains tax as well.
If you are considering the sale of your business soon, you should consult a business broker now and see how these taxes will impact the return you receive for your life’s work.
Aaron Thom
California Business Advisors