Biden’s proposed capital gains tax increase spurs car dealers to sell now!

The threat of nearly doubling the long-term capital gains tax rate is pushing more dealers to consider selling their stores now.

 

The threat of nearly doubling the long-term capital gains tax rate is pushing some families to sell their dealerships now to try to avoid losing potentially millions of dollars in proceeds, buy-sell experts say.

On April 28, President Joe Biden in his American Families Plan proposed boosting the long-term capital gains tax rate to 39.6 percent, up from 20 percent today.

 

That jump would significantly reduce a dealer’s after-tax sale proceeds. Most dealers who have owned their stores for many years would have no tax basis in their dealerships. That means upon sale, nearly all of their blue-sky value — the intangible value of a dealership, including goodwill — would be subject to the capital gains tax.

 

Dealers could possibly pay an additional $1.7 million in capital gains taxes under Biden’s proposal, accountants say.

 

An increasing number of dealers and dealer families who were considering a sale before the presidential election have fast-forwarded their plans and are actively seeking an exit in 2021, with the expectation that capital gains taxes will not increase until 2022.

 

Some dealers have told Automotive News that the capital gains threat was a factor in their decision to sell stores this year.

 

It is the ideal time, if you were ever on the fence about selling, to go ahead and head for the exit. You have the combination of record earnings, it’s a red-hot buy-sell market out there for dealers, and now you potentially have a tax increase coming down the pike. So if they do decide that I want to sell next year, or the year after that, and the tax proposal does go through, then I’m going to be selling at a lower earnings amount and at a higher tax rate.

 

Starting when?

There’s even a possibility a capital gains increase could be retroactive to some point in 2021, buy-sell experts say.

 

Congress hasn’t taken action on Biden’s plan, and some dealership accounting and buy-sell experts say it’s too early to say what parts of the proposal will stick.

 

Just the possibility of the tax hike has been a motivating factor for some clients to sell — and get it done in 2021. They are intent to get the transaction done before the end of the year. Nobody knows if there will be a tax increase or how much it will be. But I think there is a conviction that taxes are going to go up.

 

Plan taxes, timing

The difference between good and poor tax planning can be significant for dealers. They need to be more focused now, especially with this looming potential [capital gains tax] change, of not so much what they sell for, but how much they keep of what they sold for.

One option is a deferred sales trust, allowed under the IRS Code Section 453. A deferred sales trust would allow a dealer to defer capital gains taxes on the real estate and blue sky.

Proceeds can be distributed into another diverse portfolio, with income taken over time.

Dealership sales must be approved by the manufacturer, which decides whether to transfer the franchise to a new owner, and that process takes time.

Let’s just say Biden is able to pull something out, and maybe it’s not retroactive this year; let’s just say it starts Jan. 1. You may have a rush for the exit. But OEM approval of transactions, for most dealers, does not happen overnight. And if every dealer decides they want to sell in October, what are the odds that they will be able to get OEM approval before Jan. 1?

Dealers who know they’re going to sell should probably get started sooner rather than later.

It’s not like putting your house on the market and being able to get to close in 25 days.