Postponement of gain

[Black Bart]

Construction-work client sold vacant lot for $45K cash last summer (bought-1998-$15K) and a "sharp" drywall-contractor told him he's got two years to "reinvest" proceeds. I tell him he owes capital gains taxes.

With the exception of the main dodges (which don't apply to him) -- two years for involuntary conversions (I assume that's the one his pal heard about), Section 121 for houses, like-kind exchanges, transfers to spouses -- I don't know of any way to avoid taxes on the sale of property.

Does anybody else see any possibilities?

[JohnH]

Bart:

I'm a little skeptical about tax advice from drywall contractors unless they regularly use respirators on the job. (Breathing all that drywall dust impairs their ability to reason things through and renders their tax advice suspect).

He needs to seek a second opinion from his hairstylist or mechanic - they have the training. You can rely on their tax expertise any time the situation gets complex.

[Black Bart]

Re: hairstylist/mechanic

Bart:

I'm a little skeptical about tax advice from drywall contractors unless they regularly use respirators on the job. (Breathing all that drywall dust impairs their ability to reason things through and renders their tax advice suspect).

He needs to seek a second opinion from his hairstylist or mechanic - they have the training. You can rely on their tax expertise any time the situation gets complex.

Thanks John, but he's sticking with the drywaller. He said "Delbert's been to th' Army" (enhancing his tax expertise, I assume).

Kidding him a bit, I asked what the plumber on the job thought, but he said "Aw, all that guy knows is that poop rolls downhill and payday's Friday."

Do you know of anything other than those I mentioned?

[Bees Knees]

In addition to the ones you listed, you have the rollover of qualified small business stock under Section 1045. If the land were held as an asset in a corporation, the sale of the stock (the land and all other business assets) could have been rolled over into the purchase of new small business stock. Of course in order for this one to work, the corporation would have to actually be conducting business as a small business.

I would write up a summary of all tax rules that could have allowed your client to role over the funds tax free. Then I would explain why his situation does not fit any of them. Then I would explain that if he had come to me first before doing the transaction, I could have helped him follow the correct rules that would have avoided tax on the transfer. Then I would explain that is another reason why you call me first before doing anything.

Rather than apologize for not knowing tax law as well as a drywall-contractor, I would explain all the rules in detail and say that is why I do taxes and your drywall-contractor buddy does drywall.

[JohnH]

Bees:
Would it be wise to require a retainer before writing up all the what-ifs, or is it possible that the client would gladly pay for the research time, given that the result will be what he doesn't want to hear? Even worse, the result will likely conflict with the free advice already dispensed by the drywaller/tax expert, so what's the incentive to pay?

[Bees Knees]

I don't charge clients for token advice given through out the year, even if it is written. If I had to spend hours on something, then they would have to pay. I don't think this would take much time at all, and it does boost the goodwill of your business when you have the opportunity to educate a client on a tax issue.

[Black Bart]

Thanks,

In addition to the ones you listed, you have the rollover of qualified small business stock under Section 1045. If the land were held as an asset in a corporation, the sale of the stock (the land and all other business assets) could have been rolled over into the purchase of new small business stock. Of course in order for this one to work, the corporation would have to actually be conducting business as a small business...
.

I didn't know about this one. Although my guy doesn't qualify -- if it comes under the heading of token advice and I won't be charged for it, what exactly is it that qualifies a corporation as a "small business"?

[Bees Knees]

I didn't know about this one. Although my guy doesn't qualify -- if it comes under the heading of token advice and I won't be charged for it, what exactly is it that qualifies a corporation as a "small business"?

TTB Small Business Edition, page SB2-9:

Gains on Small Business Stock (§1045 and §1202)
In cases of a taxpayer other than a corporation, gains from small
business stock may be eligible for rollover under IRC Section
1045, or exclusion of 50% of gain under Section 1202.
Qualified small business stock. For purposes of Sections 1045
and 1202, “small business stock” means C corporation stock that
meets the following tests:
• The stock must have been originally issued after August 10, 1993.
• The corporation was a domestic corporation with total gross
assets of $50 million or less at all times after August 9, 1993,
up to and including the point immediately after the stock was
issued.
• The taxpayer must have acquired the stock at is original issue
in exchange for money or other property or as pay for services.
Certain individuals may meet the test if they acquired the
stock through gift or inheritance. See IRC Section 1202 for more
information.
• During the time the taxpayer held the stock, the corporation
must have been a C corporation, at least 80% of the value of
the corporation’s assets were used in the active conduct of a
qualified business (defined below), and the corporation was not
a foreign corporation, DISC or former DISC, regulated investment
company, real estate investment trust, REMIC, FASIT, cooperative,
or a corporation that has made a Section 936 election
(Puerto Rico and possessions tax credit).
Qualified business. A qualified business is any business that is
not one of the following:
• A business involving services performed in the fields of health,
law, engineering, architecture, accounting, actuarial science,
performing arts, consulting, athletics, financial services, or
brokerage services.
• A business whose principal asset is the reputation
or skill of one or more employees.
• A banking, insurance, financing, leasing, investing,
or similar business.
• A farming business.
• A business involving the production of products
for which percentage depletion can be claimed.
• A business of operating a hotel, motel, restaurant,
or similar business.

Rollover—Section 1045. If a taxpayer held qualified small business
stock for more than six months, the taxpayer can elect to
postpone gain upon purchase of other qualified small business
stock during the 60-day period beginning with the sale.
If the cost of the new stock is greater than the proceeds from the
sale of the old stock, the entire gain is eligible to be postponed. If
the cost of the new stock is less than proceeds from the sale of the
old stock, the difference is taxable.
Election. The election is made by reporting the entire gain realized
on line 1 or line 8 of Schedule D (Form 1040). Directly below the
line on which the gain is reported, enter in column (a) “Section
1045 rollover,” and enter the amount of the postponed gain as a
loss in column (f). The election must be made no later than the
due date (including extensions) for the tax return for the year in
which the stock was sold. If the original return was filed on time,
the election may be made on an amended return filed no later
than six months after the due date of the return (excluding extensions).
Write “Filed pursuant to Section 301.9100-2” at the top of
the amended return.