This is the fourth post in our series on Selling Your Assisted Living Facility. You’re reading from the first chapter about Deciding To Sell.
You’ve decided to sell your assisted living facility. You’ve received an offer at your price. You’re ready to sign the contract and close the deal. Everything is going according to plan.
Before you sign the contract, you decide to get an idea of how much tax you’ll pay after the sale.
So you talk to your CPA who works up an estimate of the tax bill and other things you’ll deduct from the sale price. And then you see it.
The estimate from your CPA lists the debt you need to pay off, the pre-payment penalty on your mortgage loan (oops, forgot about that), the other closing costs, and the tax bill.
All of a sudden, you realize that the amount you have to invest isn’t what you thought it would be. It’s much less. How will you fund that retirement nest egg? How will you live on the income you’ll generate from it going forward?
And then you realize it – you can’t afford to sell. At least now.
Will You Have Enough Left Following a Sale?
The scenario described above isn’t far-fetched. While it’s not common, I’ve seen that exact situation a few times when clients selling assisted living facilities weren’t up to date with the total costs of a sale. Their plans were stopped because they didn’t have all the information needed to decide if it was time to sell.
As we’ve discussed over the past few weeks, owners sell for a variety of reasons. But one of the reasons they sell is that they’re ready to retire or switch paths to enjoy a mini-retirement. And those plans are normally dependent on having a certain amount of investment income to help support the lifestyle they desire.
When there isn’t enough left after paying off debt and taxes, the lifestyle in retirement may not be everything they hoped. Most sellers are ready. They have plenty of equity and their tax bill is manageable. Make sure you’re one of those who is ready to sell.
Create a Pro Forma Closing Statement
Over the years, I’ve helped many clients create a pro forma closing statement. We don’t wait until closing to consider what they might expect to see on the closing statement. We draft one based on the information we have available today. For many sellers, this should be an exercise they do when completing the valuation of their property.
With a pro forma closing statement, sellers (or would-be sellers) have a better estimate of what their pre-tax cash proceeds will be from a sale. And then the seller needs to visit with their tax professional to estimate the potential tax bill too.
Talk to Your CPA
If you’ve owned your assisted living facility for some time, it’s hopefully gone up in value. And over your ownership, you’ve probably taken depreciation deductions that lower your tax basis in the property. In general, the difference between the sale price and your tax basis will be the taxable gain on your sale, with some of that probably capital gain, some depreciation recapture, or other forms of gain. (I won’t go too deep into how your tax is calculated here. Everyone’s situation is different and tax laws change so talk to your own tax professional.)
Your own quick estimate may turn out to be significantly off the mark, and that’s why I almost always recommend that would-be sellers have a conversation with their CPA early in the process to make sure they have good information to help them make a decision to sell.
Roll Over Your Investment
There is one more thing you may want to discuss with your CPA. That is, using a 1031 exchange to help defer your capital gains tax and boost your retirement income. This is a big topic that I’ll dive into deeper at another time. Many are familiar with the benefits of 1031 exchanges but few consider making an exchange part of their planning when they sell their assisted living facility.
I have seen the power of using a 1031 exchange to roll the proceeds from a sale of an assisted living facility into another type of investment real estate. The amount you would have paid in taxes is allowed to continue working for you as equity in a new investment. If you’re planning to retire following the sale of your facility, the additional monthly income that may be available to you can be substantial when that equity continues working for you.
A 1031 exchange has several requirements that must be met. And the ideal investment for your exchange may or may not be available. But if you’re deciding whether to sell your assisted living facility, you should learn more about exchanges from your CPA and others that are familiar with their use. It could make all the difference.
Know the Facts
The decision to sell your assisted living facility is a big one. For most, it’s a life-changing decision. Make sure you have all the information you need to know if the time is right and you can afford to sell now. Even if you’re not thinking about selling, keeping up with these things on a regular basis will help you be prepared for a sale whenever the opportunity (or the need) to sell comes along.
Have a question or thought about something in this article? Leave a comment below. Thanks.