The decision to sell the real estate along with your auto repair business or keep it as a separate asset is a big decision with varied financial and tax implications. In this article, I'll dig into the pros and cons of each choice and discuss what you might consider doing with a large lump sum and potential tax impacts.
Selling the Real Estate with Your Business
Pros
- Simplicity: Selling your business and real estate together simplifies the process.
- Larger Lump Sum: You'll receive a larger amount of money upfront, which you can use for retirement, reinvestment or other financial goals. Selling the property allows you to cut all ties with the business, making a clean break.
Cons
Capital Gains Tax: If the property has appreciated significantly, you may face substantial capital gains tax. You'll also lose out on potential rental income you could have earned by leasing the property to the new business owner.
Keeping the Real Estate After Selling Your Business
Pros
- Steady Income: Renting the property to the new business owner provides a steady stream of rental income, and the property's value increases over time so that you can sell it later for a profit. Rental income may have favorable tax treatment compared to a lump sum from a sale; check with your CPA.
Cons
- Owning commercial real estate comes with responsibilities like maintenance, repairs and dealing with tenants. You will still be tied to your business, which may not be good for your emotional health.
Handling a Lump Sum and Tax Implications
Receiving a large lump sum from selling your business and/or property can be both a blessing and a curse. On the one hand, it provides you with substantial money to achieve financial goals. On the other hand, it could bump you into a higher tax bracket, significantly increasing your tax liability.
To mitigate tax implications, consider a 1031 Exchange: If you reinvest the proceeds from the sale into a similar type of property (a "like-kind" exchange), you may be able to defer capital gains taxes. I recently did this on a property I sold, and it saved me from paying over $100,000 in capital gains tax.
Every situation is unique, and the right choice depends on various factors, including your financial goals, tax situation, risk tolerance and market conditions. I strongly recommend that you consult with a tax professional to understand these decisions' implications fully.
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Stay tuned for my next article about what’s next. May your passion for our industry continue.
