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Posted by Alan on July 30, 2008, 3:02 pm
Please log in for more thread options Dick Adams wrote:
>
>> There is an AICPA Case Study that supports this theory because
>> Sec. 121 does not have any language that prohibits it when the
>> sale is to a related party. It is based on a private letter ruling
>> relating to the old Section 1034 deferral of capital gain on the
>> sale of your main home if you reinvest the proceeds in a new
>> home within two years. That section did not have any language
>> that prohibited the deferral of gain when the sale was to a related
>> party where it would be depreciable property.
>>
>> You can read it here:
>> http://www.aicpa.org/pubs/taxadv/jul2008/casestudy.html
>
> For the purpose of argument's sake, let's presume you can do this.
> Now tell me who is going to give your S-Corp a mortgage so you
> can have the proceeds from the sale? Is there a State other than
> California where mortgages do not have a "due on sale" clause?
>
> If you want a workable legal exploitation of the tax code, consider
> this. A Dentist buys a lot zoned commercial, gives a 20 year lease
> of the land to a Professional Corporation which in turns builds a
> house to be used as its office and as offices leased to others, the
> PC pays the mortgage from the rents and depreciates the building.
> After 20 years or more, the Dentist terminates the lease, removes
> the tenants, sells her/his primary residence taking the $250K/$500K
> exemption, lives in the house for two years, and then sells it taking
> the exemption again.
>
> The difference between this scenario and the OP's scenario is:
> 1) Economic Substance;
> 2) The ability to get a mortgage; and
> 3) Triple dipping (two exemption and 20+ years of depreciation).
>
> This can also be done by someone in the rental housing business
> who converts rental units into their primary residence every 2+
> years.
>
> The tax code favors people who engage in tax planning.
>
> Dick
>
I'm going to assume that your two questions are rhetorical and
you are not looking for an answer.
For the record, I don't advocate entering into such a transaction
without getting a PLR.
P.S. Re California. I believe there is a federal law that makes
due on sale clauses on loans from federal banks enforceable in
all states. In addition, CA Civil Code 2924.6 appears only to bar
enforcement in limited situations.
2924.6. (a) An obligee may not accelerate the maturity date of
the principal and accrued interest on any loan secured by a
mortgage or deed of trust on residential real property solely by
reason of any one or more of the following transfers in the title
to the real property:
(1) A transfer resulting from the death of an obligor where
the transfer is to the spouse who is also an obligor.
(2) A transfer by an obligor where the spouse becomes a
coowner of the property.
(3) A transfer resulting from a decree of dissolution of the
marriage or legal separation or from a property settlement
agreement incidental to such a decree which requires the obligor
to continue to make the loan payments by which a spouse who is an
obligor becomes the sole owner of the property.
(4) A transfer by an obligor or obligors into an inter vivos
trust in which the obligor or obligors are beneficiaries.
(5) Such real property or any portion thereof is made subject
to a junior encumbrance or lien.
(b) Any waiver of the provisions of this section by an
obligor is void and unenforceable and is contrary to public policy.
(c) For the purposes of this section, "residential real
property" means any real property which contains at least one but
not more than four housing units.
(d) This act applies only to loans executed or refinanced on
or after January 1, 1976.
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