Selling your house

[Burke]

I believe there are companies that will purchase stock of corporations holding real estate.Secondly this would probably work better with a taxpayer later in years so on passing the stock gets a stepped up basis. May be a way to devise assets to beneficiaries.

I think I see where you are going with this. Corp buys house, owner/seller gets tax-free $$$ due to 121, corp's stock is then sold to outside party, and stockholder gets $$$ for the stock @15%, corp now has new owner and capital asset of property. 1244 would apply, no? And 1239 would not void 121 election? Hmmmm. Would like to see CCA on this one.

[JON]

Corp is done.

Income earned by the corp, rental, will be taxed at the highest corporate rate because your a personal holding company. You may delay the reporting of the income into 2009 or beyond.

If you liquidate the corporation in the current year the stockholder gets the money offsets his basis and for federal income tax purposes has the 15% rate. If he waits until next year or the year after will that rate still be there.

If you think rates are going down then delaying may be worth it. If rates do not go down the delay costs you money.

[veritas]

I was going to mention it

But if Sec 121 eliminates the gain it's not an issue.

[les grans]

How about IRC section 1239:

(a) Treatment of gain as ordinary income
In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167.

Anybody have a problem with that?

[veritas]

A few observations

I believe there are companies that will purchase stock of corporations holding real estate.

Secondly this would probably work better with a taxpayer later in years so on passing the stock gets a stepped up basis. May be a way to devise assets to beneficiaries.

[Burke]

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

I have researched this and do not find any reference to restrictions for the SALE of a personal home to a related party. It is a capital asset in the hands of the seller, so gain is reportable (to the extent it exceeds the limitation (500/250K), and no loss can be taken. If the corp (who would be a related party if taxpayer owns more than 50%) pays full FMV for it out of its own cash, then it owns the asset and can depreciate it under 1250. However, there are restrictions on 179 and MACRS depreciation methods for 1245 property, etc. etc. Corp would still have problem when asset is subsequently sold, so I don't see what this accomplishes. Especially if it is the seller who is now subsequently renting the property! This means the seller is taking tax-free money from the sale of the house, paying rent to the corp which is taxable to it, and then is paid back to the seller/owner as a taxable dividend? Does not make any sense at all. If corp is renting to an outside party, maybe. At least the income would be spread out over years. Still would have taxable gain from sale in the future, and rates might not be 15% then! Taxpayer might think about annual gifting of stock shares to spread the joy around.

[JG EA]

I thought that a Corporation owning real estate was not a good idea? Is this a tax avoidance scheme?

I found a website that is outlining much the same scenario as you posted.

I would say if it sounds too good to be true, it probably is!

Sandy

I agree. When examined what would happen? Would the corporation have a business purpose when applying with the state? Would the corporation have money form the shareholder to buy from the shareholder? Or would all the transactions be on paper only? Would the IRS view this like they do trusts that have no purpose except tax avoidance?

When discussing abusive trust arrangements the IRS said "Substance rather than the form of a transaction is controlling for tax purposes."

[veritas]

I don't see a prohibition

but I share some questions and observations that seem to me to have been raised but not answered.

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

for a sale to a related party except for a remainder interest.

[WhiteOleander]

The problem then would be how to get the cash out of the corporation as before the sale.

I see your point.

[erchess]

I am enjoying this thread

but I share some questions and observations that seem to me to have been raised but not answered.

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

[veritas]

Well, if the theory of the corp being allowed to buy the house from the s/h holds up and most if not all of the accumulated earnings are now gone, why not have the corp sell the house?

It would sell for basically the same price the corp purchased it for because the markets don't really fluctuate that much now, so no great gain or loss to deal with. And then the corp could be closed out.

The problem then would be how to get the cash out of the corporation as before the sale.

[WhiteOleander]

Well, if the theory of the corp being allowed to buy the house from the s/h holds up and most if not all of the accumulated earnings are now gone, why not have the corp sell the house?

It would sell for basically the same price the corp purchased it for because the markets don't really fluctuate that much now, so no great gain or loss to deal with. And then the corp could be closed out.

[veritas]

I was reading

Kleinrock's tax planning guide when I came across the idea.

I was thinking another wrinkle would be to carry a contract for part of the sale thereby reducing the income the C Corp would have.

[OtisMozzetti]

Issues about the buyer, a related party

Is this a tax avoidance scheme?

I would say if it sounds too good to be true, it probably is!

Sandy

Is a sale to a corporation in which he owns more than 50% a sale to a RELATED PARTY? Is the home sale exclusion allowed on a sale to a related party? Are there any restrictions on the depreciation by a related buyer? If there should be any gain on the sale to the related party, is that gain characterized as ordinary gain instead of capital gain?


And, as Sandy noted, isn't the corporation going to have to pay ordinary corporate tax on any future gains in the real estate value, on top of whatever you may pay when the corporation distributes those future gains to you?

[les grans]

And "at the end of the day" what've you got? You've got a C corporation with a pile of cash (from the rental income of your ex-residence) that also owns a highly appreciated piece of real estate (you hope) and you've still got a serious case of potential double taxation.

Maybe an S corporation would get to a better result... Maybe you'ld have to wait ten years for the built-in gain to disappear. Maybe there's a better plan... I don't know.