Like selling real property, one should not contemplate buying or selling tangible or intangible personal property without consulting with your tax advisor.
The most common assets sold by most taxpayers are investments assets consisting of stocks or other securities. Typically, the length of time a taxpayer owns the security is critical in determining the amount of tax owed. Long-term capital gain rates are much more favorable than ordinary income tax rates.
Example using $100,000 gain in the 25% tax bracket:
- Held short term pays $25,000 in tax
- Held long term pays $15,000 in tax
In addition to the holding period, the timing of security sales that generate large capital gains should coincide with years when the taxpayer has, otherwise, little income, or losses, deductions, and credits to offset the income. Normal long-term capital gains can be taxed at either 0%, 10%, 15%, or 20%, depending on the marginal tax rate on the taxpayer’s other income; the lower a taxpayer’s marginal tax rate, the lower the long-term capital gain rate.
Capital losses play an important role in any decision related to the sale of capital assets. Capital losses are only deductible in a current year only to the extent they exceed capital gains plus $3,000. That’s the bad news. The good news is the excess losses are carried forward into future years. These carryovers, if significant, can offset future capital gains.
Moving away from investment activities, buying or selling personal property used in a trade, business, or rental activity has many additional complexities. Selling tangible or intangible property in these activities might not receive favorable long-term capital gain rates, particularly if the assets have had significant depreciation or amortization deductions claimed on them; any depreciation or amortization recapture is taxed at ordinary income tax rates.
The deferral of gain on like-kind exchanges also applies to the sale of personal property. Typically, business owners will see this play out in the purchase of business use vehicles when an old business use vehicle is traded as part of the transaction.
Finally, the sale or purchase of a business can be an extremely complex transaction that requires careful planning and consideration. In a separate post, we will discuss some the issues surround this type of transaction.