Upcoming $5M business sale in CA – here’s what we talked about.
Had a call with an owner expecting a ~$5M business sale in Q1.
Between the assets they already have and the sale proceeds, we should be able to offset a large chunk of the capital gains. Why?
Because a tax‑aware long/short SMA can, in the right structure and size, harvest 90%+ of the account’s value in losses in year one. Those realized losses can directly offset realized gains from the business sale.
Part of the sale will be treated as ordinary income, which for high‑earning CA residents can be taxed at 50%+. So we talked about how their three rental propertiescould potentially create a deduction.
The IRS allows you to depreciate, or “write off,” part of the value of rental real estate. They’ve only been doing straight‑line depreciation, which means there’s an opportunity to:
- Run cost segregation studies
- Elect bonus depreciation
That can front‑load a very large deduction.
Default rule:
- If you own rentals but work full‑time in another business, those losses are usually “passive”
- Passive losses can only offset passive income
That’s a problem, because a business sale is typically active.
But there’s a potential solution: Real Estate Professional Status (REPS).
If someone qualifies for REPS, those rental losses can be treated as non‑passive, which means they can potentially offset active income (like the business sale).
In plain English:
Sell the business in Q1, then spend the rest of the year materially participating in real estate, and you may qualify for REPS if you and your CPA do it correctly.
It’s critical to work with a CPA / tax advisor who understands this area to document it properly and handle the elections.
Between:
- A long/short SMA as a tax-loss harvesting source and
- REPS + cost segregation strategy on their rentals
…they have the potential to avoid millions of dollars in taxes that would otherwise just be gone.
If you’re a CA business owner staring at a 7‑ or 8‑figure sale and you’re not having conversations like this with your team, you’re almost certainly leaving money on the table.