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Posted by jt on November 28, 2006, 1:03 am
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I own a piece of property that I lived in from 2000 to 2003.
The five year time period for me to claim the 250K capital
gains exclusion is almost up and I haven't yet sold the
property. If I sold this property to my corporation for
fair market value, would I then be able to claim the capital
gains deduction or would that not be considered an
arms-length transaction?
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Posted by rayslack on December 4, 2006, 5:57 pm
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jt@atlasmiami.com wrote:
> I own a piece of property that I lived in from 2000 to 2003.
> The five year time period for me to claim the 250K capital
> gains exclusion is almost up and I haven't yet sold the
> property. If I sold this property to my corporation for
> fair market value, would I then be able to claim the capital
> gains deduction or would that not be considered an
> arms-length transaction?
I'm curious about this too.. Anyone know? I found this
article online that deals with something similar.
http://realtytimes.com/rtcpages/20020715_twoyearrule.htm
Here is the excerpt from it. Anyone comment?
However, there is another approach which you may want to
consider. However, a strong caveat is in order: this
approach has not been approved nor authorized by the IRS.
Before l997, when Congress enacted the Tax Reform Act
authorizing the up to $500,000 exclusion of gain, homeowners
were subject to what was known as the "rollover". Under this
approach, if you sold your principal residence, and within
either two years before or after the date of the sale you
purchased another property, you were able to defer any gain
which you made on the sale. The gain was deducted from the
sales price of the new house, so that your tax basis was
lowered.
Example: you purchased property for $40,000 and put in
$25,000 worth of improvements. You sold the property for
$300,000, and within two years had purchased another
property worth at least $300,000. Although the new price was
$300,000, since you had made a profit of $235,000 ($300,000
- 65,000), this profit was "rolled over" to the new house.
Accordingly, the basis for tax purposes of the new $300,000
was still only $65,000. The tax theory for this was simple;
you did not avoid tax, but only deferred it to a time when
you ultimately sold your house. Then, assuming there were no
other tax-saving devices available, you would have to pay
all of the gain you made on all houses.
However, many people found that although they purchased a
new house, they were unable to sell their old one within the
two year period.
What did they do? They created a sub-chapter S corporation,
and sold the property to their corporation for the full
market price. This way, they deferred the tax on the sale,
and when the subchapter S ultimately sold the property, its
gain was relatively small.
A subchapter S corporation gets its name from the section of
the Tax Code permitting such corporations. Over-simplified,
this is a legal entity that is taxed much like a
partnership, in that profits are taxed to the shareholders
and not to the corporation.
In l983, an enterprising individual found himself in the
situation where he had purchased a new house, but was not
able to sell the old one within the two year period. Rather
than despair -- and clearly rather than pay the capital
gains tax on the profit he anticipated on the sale of his
principle residence -- he decided to sell the house to a
wholly-owned Subchapter S corporation that he had created.
The IRS was asked to give its opinion. In a private letter
ruling dated September 13, l983, the IRS wrote the
following:
...we conclude that section 1034 would govern the... sale of your home
to Corporation provided that both the "old residence" and "new
residence" qualify as your principal residences. No gain would be
recog-nized to you provided the sale met all of the quali-fications of
section 1034 of the Code.
However, if the new residence is later sold and gain
recognized, that gain will be recognized as ordinary income
to the extent of the gain that would have been ordinary
income were it not deferred upon this sale under section
1034 of the Code. (Private Letter Ruling, 83-50084)
The IRS also stressed that under the facts of this case, the
taxpayer had unsuccessfully attempted to sell his old
residence before contemplating the sale of the Sub S
Corporation.
It must be emphasized that this was a private IRS letter
ruling, directed to a particular person. According to the
IRS, such letter rulings may not be used or cited as
precedence. However, the law was still the law, and the
thought process of the IRS did give us some helpful guidance
in those days.
It should also be pointed out that in l989, the IRS also
issued a letter ruling on a similar topic, but this time
stated that "no opinion is expressed as to whether the sale
of Residence A to a corporation wholly-owned by Husband and
Wife is a bona fide sale for purposes of section 1034 of the
Code." (Letter Ruling 89-46021, August 18, l989.)
Clearly, there is no roll-over in existence today. However,
it would appear that if you cannot sell your house now, you
should consider selling it to a sub-chapter S, and if you
are challenged by the IRS, you can make the same analogy to
the roll-over concept. Incidentally, in the l980's, we used
the sub-chapter S as the vehicle to test this concept.
Nowadays, you might want to consider creating a limited
liability company (LLC)-- wholly owned by the same owners as
currently own your house -- and transfer the property to
that LLC.
You will probably have to pay a recordation and transfer tax
to the local government where your property is located. But
again, this cost will be far less than the capital gains tax
you may have to pay.
You also have to change your homeowner's insurance policy
and put it in the name of the corporation or the LLC. If you
have a mortgage, discuss the situation with your lender in
advance of the transaction. You do not want your lender to
call the loan, exercising the so-called "due on sale"
clause. Most lenders will be understanding -- provided you
let them know in advance of the sale.
Thus, one approach to defer payment of the capital gains tax
is the sale of the old residence to a sub-S corporation or
to a limited liability company. There are absolutely no
guarantees that this technique will work, but it may be
worth your exploring. You must, however, fully discuss this
approach with your financial, tax and legal advisors before
embarking on this route.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Stuart A. Bronstein on December 5, 2006, 9:09 pm
Please log in for more thread options rayslack@mail.com wrote:
> jt@atlasmiami.com wrote:
>> I own a piece of property that I lived in from 2000 to 2003.
>> The five year time period for me to claim the 250K capital
>> gains exclusion is almost up and I haven't yet sold the
>> property. If I sold this property to my corporation for
>> fair market value, would I then be able to claim the capital
>> gains deduction or would that not be considered an
>> arms-length transaction?
> I'm curious about this too.. Anyone know? I found this
> article online that deals with something similar.
>
> http://realtytimes.com/rtcpages/20020715_twoyearrule.htm
> Here is the excerpt from it. Anyone comment?
I don't specifically know. But it seems to me that one
problem could be section 351 and 311. If you satisfy those
statutes to the extent that the sale to the corporation (I'd
think a C-corp is probably safer than S-corp) then you might
be ok.
The other problem is what happens after the property gets
sold by the corporation? Presumably it will pay off the
outstanding note, most of which should be tax free. But
then what? If you dissolve the corporation the IRS might
come in and try to colapse the transaction with the
step-transaction doctrine.
With that much money at stake, it seems to me that it would
pay to get a tax lawyer to look into the law and regulations
to see if and how to do this.
Stu
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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