A tax-smart way to develop and sell appreciated land
Let’s say you own highly appreciated land that’s now ripe for development. If you subdivide it, develop the resulting parcels and sell them off for a hefty profit, it could trigger a large tax bill.
In this scenario, the tax rules generally treat you as a real estate dealer. That means your entire profit — including the portion from pre-development appreciation in the value of the land — will be treated as high-taxed ordinary income subject to a federal rate of up to 37%. You may also owe the 3.8% net investment income tax (NIIT) for a combined federal rate of up to 40.8%. And you may owe state income tax too.
It would be better if you could arrange to pay lower long-term capital gain (LTCG) tax rates on at least part of the profit. The current maximum federal income tax rate on LTCGs is 20% or 23.8% if you owe the NIIT.
Potential tax-saving solution
Thankfully, there’s a strategy that allows favorable LTCG tax treatment for all pre-development appreciation in the land value. You must have held the land for more than one year for investment (as opposed to holding it as a real estate dealer).
The portion of your profit attributable to subsequent subdividing, development and marketing activities will still be considered high-taxed ordinary income, because you’ll be considered a real estate dealer for that part of the process.
But if you can manage to pay a 20% or 23.8% federal income tax rate on a big chunk of your profit (the pre-development appreciation part), that’s something to celebrate.
Three-step strategy
Here’s the three-step strategy that could result in paying a smaller tax bill on your real estate development profits.
1. Establish an S corporation
If you individually own the appreciated land, you can establish an S corporation owned solely by you to function as the developer. If you own the land via a partnership, or via an LLC treated as a partnership for federal tax purposes, you and the other partners (LLC members) can form the S corp and receive corporate stock in proportion to your percentage partnership (LLC) interests.
2. Sell the land to the S corp
Sell the appreciated land to the S corp for a price equal to the land’s pre-development fair market value. If necessary, you can arrange a sale that involves only a little cash and a big installment note the S corp owes you. The business will pay off the note with cash generated by selling off parcels after development. The sale to the S corp will trigger a LTCG eligible for the 20% or 23.8% rate as long as you held the land for investment and owned it for over one year.
3. Develop the property and sell it off
The S corp will subdivide and develop the property, market it and sell it off. The profit from these activities will be higher-taxed ordinary income passed through to you as an S corp shareholder. If the profit is big, you’ll probably pay the maximum 37% federal rate (or 40.8% percent with the NIIT. However, the average tax rate on your total profit will be much lower, because a big part will be lower-taxed LTCG from pre-development appreciation.
Favorable treatment
Thanks to the tax treatment created by this S corp developer strategy, you can lock in favorable treatment for the land’s pre-development appreciation. That’s a huge tax-saving advantage if the land has gone up in value. Consult with us if you have questions or want more information.
Improving your company’s sales pipeline management
“It’s in the pipeline!” Business owners often hear this rather vague phrase, which may be good news in some cases or code for “don’t hold your breath” in others.
Your sales pipeline, however, is a very real thing. Simply defined, it identifies and quantifies the prospective deals in progress at various stages of the sales process. Properly managing your pipeline can help your business avoid losses and meet or even exceed its revenue goals.
6 commonly held stages
Many people confuse the sales pipeline with a sales funnel, but these are two separate concepts. A sales funnel is a visual representation of the sales process from the buyer’s perspective. It typically begins with someone becoming aware of a product or service and then moving on to interest, decision and finally action.
The sales pipeline also has several commonly held stages, but they’re a bit different. Most models identify them as:
- Lead generation,
- Lead qualification,
- Engagement with the lead,
- Relationship building,
- Deal negotiation, and
- Closing.
As you might suspect, volumes could be written and discussed about each stage of the pipeline. Suffice to say that effective sales pipeline management entails knowing precisely where each prospective deal lies among these six stages. Then you must push those deals, with appropriate pressure, through closing to become sales wins.
From data to done deal
Like so many other things, sales pipeline management in today’s business environment is data driven. Succeeding at this task generally begins with identifying, calculating and tracking the metrics that provide the best insights into how to efficiently and effectively run your pipeline. These may differ somewhat depending on your mission and customer base, but common ones include:
- Average deal size (the sum of total revenue achieved in a given period divided by the number of sales wins for the same period),
- Sales win rates (the total number of sales opportunities created in a given period divided by the number of sales wins in the same period),
- Number of deals in the pipeline (simply the number of vetted, bona fide leads in the pipeline), and
- Sales pipeline value (the total estimated value of all active, viable opportunities currently in the pipeline).
The purpose of these and the many other pipeline-related metrics isn’t to create data in a vacuum. Your objective is to channel this raw data into accurate sales forecasts that enable you to discern which customers and prospects offer the highest likelihood of success. From there, your sales team can devise broad strategies and specific tactics to move deals through the pipeline as quickly as possible.
And while your salespeople are out on the front lines doing their thing, management and company leadership need to be able to keep a close eye on progress. For this purpose, many businesses invest in software that provides real-time info and “dashboard” visuals. Dedicated sales pipeline management software is available. However, if you already have a customer relationship management system, it may offer suitable functionality.
Optimize, optimize, optimize
Your ultimate objective in sales pipeline management is optimization. By mindfully building, vigilantly monitoring and constantly improving your pipeline, you’ll improve the odds that your sales team will meet its goals and, in turn, your company will achieve its profitability objectives. Contact us for help reviewing your sales numbers, choosing the right pipeline-related metrics and analyzing the data involved.
Moving Mom or Dad into a nursing home? 5 potential tax implications
More than a million Americans live in nursing homes, according to various reports. If you have a parent entering one, you’re probably not thinking about taxes. But there may be tax consequences. Let’s take a look at five possible tax breaks.
1. Long-term medical care
The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that are provided under care administered by a licensed healthcare practitioner.
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.
2. Nursing home payments
Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.
3. Long-term care insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.
Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2023 limit on deductible long-term care insurance premiums is $4,770, and for those over 70, the 2023 limit is $5,960.
4. The sale of your parent’s home
If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion ($500,000 if married), the seller must generally have owned and used the home for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.
5. Head-of-household filing status
If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.
These are only some of the tax issues you may have to contend with if your parent moves into a nursing home. Contact us if you need more information or assistance.