Chances are that your current CPA, Attorney, Financial Advisor or Real Estate Professional do not specialize in the area of capital gains tax savings. This may result in misinformation or lack of any helpful advice from those who you rely on for major financial guidance. It is essential to work with someone familiar with current tax law, planning strategies and your entire financial situation to get the assistance you need. The following steps will give you a head start to find the right person to help minimize your tax obligation.
- Find out how much you will owe in taxes if you do not implement a tax planning strategy. This is a crucial first step, because it will allow you to compare which strategy provides you the most benefit in savings. Not all tax professionals are aware of how to calculate the tax liability for every situation.
- Be sure all of the tax consequences are outlined. Some of the considerations are federal, state and/or city capital gains tax, recaptured depreciation, long or short term gain involved, corporate taxes (if applicable) and whether or not the Alternative Minimum Tax will be triggered by the sale. Be sure all of the taxes relevant to your situation are added and considered.
- Work with someone who can outline all of the strategies available to you. Many advisors are only aware of one specific strategy and will try to make it work for any situation. Rarely will they offer additional alternatives, so you may never be aware they exist. Have an advocate to ask the right questions to determine the details of a tax strategy and its long term effects. It is difficult to determine which plan to choose if you only hear the "selling points" and not the potential risks or down side.
- Be sure the rest of your financial picture is being considered. If you have only one asset to sell, it is crucial that the proceeds meet your long term financial goals. Factors that come into play are age, income needs now and in the future, estate planning needs, legacy wishes, inflationary impact, risk tolerance, etc. All of these come into play when determining which strategy or combination of strategies to implement.
- Accept that tax law is constantly changing and new tax saving options are continually emerging. Don't count something out because it hasn't been available for decades. That's not to say jump into something you don't understand, but be open to a concept that may be unfamiliar even to practicing professionals. If the method is grounded in solid tax practice and follows allowable tax guidelines it should be at least considered. If it sounds too convoluted to understand it may not be for you.
- Be sure your advisor is open to being educated. Don't assume they know everything about capital gains tax planning. We often rely on advice from people we have known for a long time and trust. If they have our best interest at heart, they are open to learning about new concepts that can not only help you, but also help future clients. Beware of the advisor who won't participate in the planning process or nixes a strategy before fully understanding how it works. They often are either lazy or have their own agenda for your proceeds.
This is the time to work together with a specialist. A general practitioner is typically not enough. It is critical to know the right questions to ask and be able to reasonably evaluate the ansers provided. If done correctly, you literally have the potential to save hundreds of thousands of dollars that go a long way towards a more secure financial future.