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10877668 sThink Before You Buy: Planning for Asset Purchases and Sales

One of the easiest ways to reduce your tax bill is to properly plan your asset purchases and sales. This involves keeping some basic rules in mind, and thinking about the tax effects throughout the year. Here are a few things to consider.




Timing Is Everything

Timing is critical when you buy or sell assets. In addition to planning for capital gains or losses you may realize on investments, it is important to carefully time purchases of real estate, property, and equipment. Let’s review some key time triggers. The holding period for most capital gains is one year. Making sure you exceed the one-year mark can save you tax dollars since you get to use the lower capital gain tax rate. And for assets purchased after 2000, a 5-year holding period can net you an even lower rate.

  • Tax deferral is possible in a like-kind exchange or involuntary conversion (gain from condemnation or insurance reimbursement). However, to postpone the gain, you must meet the strict time deadlines for identifying and acquiring replacement property.

Don't Get Carried Away

Purchasing too many assets in one year can have disadvantages if it triggers deduction limitations. Sometimes waiting a few weeks to purchase assets can make a huge difference.

  • Mid-quarter convention is the technical term for the depreciation “hit” taken when you buy too many business assets at the end of the year. If over 40% of your purchases are in the last quarter of the year, your depreciation deductions for the year—on every asset purchased during the year—will be reduced.
  • The expensing election under Code Section 179 is also reduced or eliminated if you purchase too many assets during the year. In 2008, business owners can write off up to $250,000 of qualifying purchases. The deduction is reduced dollar for dollar if you buy more than $800,000, and if your purchases exceed $1,050,000, the remainder must be depreciated over time.

Start Off Right with New Purchases

Make sure that you get all of the depreciation to which you are entitled. This can be as simple as confirming that assets have been set up correctly on your in-house depreciation schedule, or it can involve tax advice on the character of expenditures.

  • Capitalizable costs associated with purchases are added to the basis of the property and depreciated. This includes items such as freight, installation charges, commissions or finder’s fees, and paperwork charges.
  • When you purchase real estate, consider a cost segregation study. This analysis “finds” depreciation deductions by identifying component assets with shorter lives. Generally, real estate must be depreciated over 27.5 or 39 years on a straight-line method. A cost segregation study identifies property components and related costs that can be depreciated over 5, 7, or 15 years using an accelerated method. Examples of such components include: decorative fixtures, cabinets and shelving, land improvements, and soft costs such as architectural fees. You should also consider a cost segregation study when you construct a new facility, or remodel or expand an existing facility.

People often enter into a sales transaction thinking they’re getting a great deal. Then, when tax time rolls around, they’re hit with an unexpected tax bite. Watch out for these traps:

  • Depreciable property usually triggers ordinary income when it’s sold. You must pick up depreciation recapture at tax rates higher than capital gain rates.
  • Installment sales can have a worse result. The ordinary income depreciation recapture is triggered in the year of sale—even if no payments are received. If you don’t factor this in, an installment sale could leave you short on cash to pay tax due on the gain.
  • Selling depreciable business property to a related person or company can also worsen your tax bite. All gain from the sale will be taxed at ordinary income rates—not at capital gain rates.
This information is for informational purposes only and should not be construed as tax advice.  Please consult with your tax advisor.


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