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Death And Taxes
Have you ever owned a stock, or piece of real estate that you wanted to sell? You felt the time was right to take your profit and run. Did you then not follow through with the sale because “the taxes would kill you?” This is what I call “making a decision based on taxes.” It is not “Good Horse Sense.” What is horse sense? This is where the horse knows that a certain spot is dangerous and it will not step there. The rider, not seeing the danger, sometimes pushes the horse to move forward, but the horse refuses. People quite often will not trust their “sense.” Women are known for their “instincts” about people. Men are not always as “sensitive” of their instincts as women are. Lets get back to business instincts.
In the stock market the smart money always says, “Bulls make money. Bears make money. Pigs lose money.” What does this mean? It means, “Never be afraid to take a profit.” If it is time to sell, sell! Take your profit and wait until the time is right to get back in. Taxes sometimes make this very difficult. If you sell, the taxes may eat up 30-50% of the profit.
Then again, if you do not sell, when you think the timing is right, you may lose 100% of the profit and some of the principal. It is always smarter to make your business decision first. It is also very important to not consider the tax consequences while making this sound business decision. After you have decided what you want to do based on sound business strategies, then you see your tax accountant and figure out how to do the deal, so as to pay the lowest possible taxes. Do not do it the other way around. Which means, selling when you have a tax loss or a real loss because there would be no taxes to pay.
Many an investor, because of the fear of taxes, held an investment all the way up and then all the way down. The economy runs in 7 to 10 year cycles of boom and bust. Sell in the booms and buy in the busts. If you do not sell at the top, there is no money to buy at the bottom. If your accountant is worth his fee, he will figure out how to shelter the sale. Do call him before making the sale, so he can tell you how to structure the deal. If he can’t help you, get a new accountant. An accountant’s job is not to do your tax return. It is to advise you how to pay the least taxes using all of the legal tax avoidance techniques, allowed by the IRS.
I have a friend who owned millions of shares of Microsoft. He was worth millions of dollars. Microsoft was the only thing he owned. He was an employee of the company and received stock options. He came to me worried about the company and asked me what to do. I suggested that he sell some of the stock and buy real estate. He was afraid to change horses and paying income taxes worried him. He decided to stick with Microsoft. Two months later Microsoft lost a court case and the stock price crashed. He now tells me “After it goes back up I might diversify.” How much do you want to bet on him doing anything? “After the horse is out of the barn, it is too late to close the gate.”
I met a man who owned an apartment building in the worst part of San Bernardino. In 1991 he was offered 0,000 for his building, but he refused it because of his concerns for capital gains taxes that he would have to pay. Over the next 8 years, the San Bernardino economy went down hill along with the real estate prices. His building became so vandalized that it was eventually boarded up. He sold the building to one person who thought he could repair the building. He couldn’t and our man foreclosed and took the building back. Again he sold the building, for 0,000 this time.
This second buyer also couldn’t make it work and today the second buyer stopped making the payments. He is also going to give the building back. Our man has had lower cash offers but he keeps trying to get as close as he can to that old 0,000 price. Therefore he keeps selling and financing that property so as to get a better price. He hasn’t learned that sometimes it is better to take the money and run.
Never bet the farm on a sure thing. The only sure thing is death and taxes. Also remember that the bank is not going to be nice if you get in trouble. Always have enough cash reserves, and keep your expenses down so you can always have money for food, insurance, gas, etc, and the low house payment. Accountants may give good tax advice but it may not be good business advice. So, NEVER MAKE A BUSINESS DECISION BASED ON TAXES.
About the Author: Willard Michlin is a Business Broker, California Real Estate Broker, Accountant, Well known Public speaker and Administrative/Business Consultant. He can be contacted at his Ventura, California office by calling 805-529-9854 or by e-mail at firstname.lastname@example.org. See other articles by Willard Michlin at http://www.kismetbusinessbrokers.com