Real Estate investing is popular for many reasons, but one, in particular, is the ability to write off depreciation. Real Estate investors also get 1031 exchanges, where they can use assets from a past sale to fund a new purchase and roll the capital gains over! You can delay paying taxes.
Finance has its own tax-advantaged version that very few people have heard of: It’s called Section 1202 – Small Business Stock.
Here it is:
- You invest in a C-Corp.
- The valuation of the business must be under $50 million when you invest (Enterprise Value).
- You hold it for 5 years or more.
- When you sell, the greater of $10 million or 10x your investment is federally tax-free.
Rules
- You must buy the stock directly from the company (this is opposed to buying a stock on an exchange).
- You have to have purchased the stock with cash, but other things may apply like real estate or accepting payment for service.
- You can purchase the shares as LLC, S Corp, LP, but NOT a C-Corp.
- The company you are buying into may be an LLC (remember it has to be a C-Corp), but you will tax the company as a C-Corp and still apply.
- Some industries do not apply; banking, insurance, leasing, farming, restaurants, oil and gas, and personal services (law, health, architecture, consulting, and accounting) do not apply.
