Example 8 in CFAI book - Concentrated position
How Lee would monetize 3.75 million in sale and leaseback scenario!! why monetize it is a sale scenario!!
Given a 5 Millions sale, How is the capital loss carryforwards of 1.5 million used to FULLY offset the 25% c.gain tax of 1.25 million!!?
If there was no carry forward of capital loss Lee would have to pay $1.25 M in Capital Gain taxes (25% Capital Gains Tax assuming a cost basis of 0 = 25% * $5 M) and hence recieve only $3.75 M in the sale and leaseback option.
Because of his $1.5 M Capital Loss which is carried forward and adjusted against the Capital Gain, Lee receives $5 M in hand by doing a sell and leaseback vs. $3.75M in the refinance option.
Thanks a lot for your input
I thought the carry forward loss is deducted from sale price befor calculating the C.Gain tax
i.e 5M - 1.5M = 3.5M then a C.Gain taxe = 25% * 3.5M = 0.875 M … thats why I was confused
Is the $1.5M deferred tax asset amount relevant in that case?
I understand that we only care about the amount of $5M losses to carry forward to determine the solution.
Am I missing something?
When we sell assets, we pay taxes for the gains, or carry tax losses as a deferred tax asset. In this case are taxes on capital gains.
if you carry a tax loss (you declared a prior loss in the sell of assets), you can net the gain taxes against that tax loss in order to pay lower taxes. This “application” of tax losses will depend on the type of operation you are executing. In the case of a direct sale, you can make use of the tax loss. In the case of a refinancing (leaseback), you wont use the tax loss because a leaseback is exempt from taxes1
1/ Leasebacks are not seen as a sale (despite it is indeed a sell of an asset) because the economic purpose of the leaseback is to continue using the asset. IFRS, US GAAP and most countries fiscal regulators do not consider leasebacks as a sale.
“1/ Leasebacks are not seen as a sale (despite it is indeed a sell of an asset) because the economic purpose of the leaseback is to continue using the asset. IFRS, US GAAP and most countries fiscal regulators do not consider leasebacks as a sale.”
Good point to know!