Opinion: How to assess capital gains taxes when selling a small business and its inventory

Dear Mrs. MoneyPeace:

I am a 70 year old single man. I own a farm that has been in my family since I was born. I am also a metal artist. Your article on digital assets caught my attention. I am thinking of selling my property, but I have very few basic costs. For example, it may be worth $1 million, but I can only prove that I invested $100,000 in it.

I have artistic assets. For example, a large sculpture. Do you think I can somehow turn this into an NFT or assign a value to it in some other legal way and include it in the sale of the property?

Obviously, I don’t want to pay an outrageous capital gains tax if I can avoid it.

Thank you for your time,

Andy Artist

Send your questions to Ms. MoneyPeace: [email protected]

Dear Artist Andy:

You have two questions in one, and you have to separate the issues to understand capital gains calculations.

First, you own real estate, which I assume is your personal home. Second, you are a business owner with inventory. Although you can operate the business on your property, when it comes to selling them, they are valued differently and separately.

First of all, real estate is a tangible asset. For tax purposes, what matters is when the deed is entered in your name. If you inherited it, then the property had a base or estimated value. This may be in your estate attorney documents. (Or you can try land records or estimated real estate value.) If you bought the property from a family member, you have access to purchase and sale documents showing what you paid.

You add the cost basis to the cost of improvements you brought to the property. These are tangible improvements such as landscaping or building additions that will sell with the property. Not the maintenance over the years of mowing the lawn or painting to keep the property in good condition. See list below for clarity and consult IRS Release 2021 523page 9. Next, review your records and dig up your calculator to find your full tax base when you file for the 2022 tax year.

Improvements include:

  • Heating system

  • Central air conditioning, humidifier, central vacuum

  • Wiring security system

  • lawn sprinkler system

  • Storm Windows/Exterior Doors

  • Pipe and conduit works

  • Septic system

  • Water heater

  • Built-in appliances

  • Kitchen modernization

  • Wall to wall carpet

Lily: Here’s how you can save money on capital gains when you sell your home

Your base when you sell the property will be the base price plus the cost of the upgrades. Remember that you may qualify for a capital gains exclusion of $250,000 ($500,000 if you were married) if this has been your principal residence for the last five years and you meet other conditions . Therefore, your capital gains tax may not be as high as you fear. To see IRS Publication 523.

Your business is a distinct asset. Selling the business will have its own set of tax rules, depending on whether you are operating it as a sole proprietorship or an S-corporation.

The artwork you created is part of your business inventory. These pieces can either be part of the sale or sold individually in the format of your choice.

Selling artwork as a non-fungible token (NTF) is still a work of art, following the same tax rules despite being digital art. As you know, carvings are usually valued at what a buyer is willing to pay.

Companies are valued differently than art but subject to capital gains. Companies also include the value of goodwill, which is intangible but based on adding value due to a good reputation.

The only overlap for your home is if you had a home office or artist’s studio and claimed a home office deduction on your taxes. There will be an impact as you add the depreciation claimed over the years which will impact your capital gains.

If all of this seems confusing or overwhelming, consult a tax professional who does it every day and can make your life easier. These are two great moves that you don’t want to get wrong.

CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal finance speaker. She blogs at MoneyPeace.

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