Do you or your clients have liquidity events on the horizon in 2024?
Two common ways for high-net-worth individuals to “cash out” their ownership stakes include selling a business and selling shares after an initial public offering (IPO).
Liquidity events often generate capital gains, which trigger significant tax consequences—let’s explore how Opportunity Zone investments can help offset the potential pain.
Selling a business
As the US economy shows signs of stabilization, more business owners are asking if the time is right to sell their company—especially boomers. Retirement is among the top reasons for transitioning a company to new ownership. As the number of boomers reaching retirement age continues to rise, many experts expect to see a surge in business sales.
14% of self-employed people in the US have reached 67, which is full retirement age according to the Social Security Administration. A decade ago, that figure was just 9%. Census Bureau Data, as cited by Federal Reserve Bank of Minneapolis, January 13, 2023 [3]
Some aging business owners may need to sell unexpectedly when faced with health or financial issues. Other proprietors—including those in younger generations—with profitable businesses and strong financials may look to take advantage of improving market conditions.
Whatever the reason for selling, the tax consequences can be substantial. Here’s how the IRS summarizes the federal tax framework for the sale of a business:
A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.[1]
Managing the complex federal and state taxes associated with a business sale is an important endeavor—especially when the seller intends to use the proceeds to fund their retirement. A team of qualified professionals, including tax advisors and attorneys, can be incredibly valuable in these circumstances.
Selling shares after an IPO
For those who hold shares in a private company, an IPO often represents a long-awaited opportunity to reap the rewards from years of hard work. Some founders, executives or early employees may be able sell shares as part of the IPO itself; most other employees will be able to sell in the public markets after the lockup period ends (often 180 days). They will pay long- or short-term capital gains taxes if the shares are sold for a profit.
Will IPO markets finally reopen in 2024? Some experts think a soft landing and steadying markets may fuel more IPO activity:
All eyes are now on 2024, when we expect more IPO activity given the large backlog of issuers who we see actively focused on public company readiness, and continuing to drive improvements in their business models and metrics. We are cautiously optimistic a sustained re-opening of the IPO market is finally coming.
Mike Bellin, PwC US IPO Services Leader[2]
Maximizing outcomes with Opportunity Zone investments
When navigating liquidity events, individuals and advisors can look to Opportunity Zone investments to manage capital gains taxes and maximize long-term wealth. Created as part of the Tax Cuts and Jobs Act, Qualified Opportunity Zones are designed to promote economic development and job creation in distressed communities.
The primary benefits include:
- Temporary deferral of taxes on past capital gains – Taxpayers who invest in Qualified Opportunity Zone property through a Qualified Opportunity Fund can temporarily defer tax on the amount of eligible gains they invest. This ability to postpone tax payment can be a helpful tool when managing capital gains from liquidity events. Investors can defer tax on the invested gain amounts until there is an “inclusion” event, or December 31, 2026 (payable in 2027 when filing the 2026 return), whichever is earlier.
- Basis adjustment to fair market value – If a Qualified Opportunity Zone investment is held for at least 10 years, then the investor pays no taxes on any capital gains produced through the Qualified Opportunity Zone investment.
- Diversification – Qualified Opportunity Zone investments are largely related to real estate and available as single-asset and diversified investment pools. As such, the program can help clients diversify beyond traditional stock and bond investments.
Gains that may be deferred include both capital gains and qualified 1231 gains that would be recognized for federal income tax purposes before January 1, 2027, and are not from a transaction with a related person. Taxpayers are not required to invest their entire capital gain, and generally have 180 days from the sale date or capital gain to invest in a Qualified Opportunity Fund.
At Caliber, we’re particularly excited about the year ahead. Contact our team to learn how we’re capitalizing on uniquely favorable market conditions in our Opportunity Zone strategies.
[1] Sale of a Business, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/sale-of-a-business
[2] “2024 Capital Markets Annual Outlook”, PwC, https://www.pwc.com/us/en/services/consulting/deals/us-capital-markets-watch.html
[3] https://wwww.minneapolisfed.org/article/2023/
why-are-boomer-business-owners-hanging-on to their-businesses long-past-retirement-age
About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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