sell home to your corp or LLC to become a rental and claim $500k exemption?


I

inky dink

I read, on a much less astute site than MTM, that you can sell your home to
your own S Corp (and thus I assume an LLC as well), claim the $500k (or
$250k single) income tax exemption on the gain of the sale of your home, and
keep the house in your separate entity as a rental. Your entity's
depreciation will then be based on its purchase price, not your original
acquisition cost. And, of course, "the IRS is fine with this".

comments?
 
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A

Alan

inky said:
I read, on a much less astute site than MTM, that you can sell your home to
your own S Corp (and thus I assume an LLC as well), claim the $500k (or
$250k single) income tax exemption on the gain of the sale of your home, and
keep the house in your separate entity as a rental. Your entity's
depreciation will then be based on its purchase price, not your original
acquisition cost. And, of course, "the IRS is fine with this".

comments?
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

The letter ruling is 8350084.
 
J

jerry gitomer

inky said:
I read, on a much less astute site than MTM, that you can sell your home to
your own S Corp (and thus I assume an LLC as well), claim the $500k (or
$250k single) income tax exemption on the gain of the sale of your home, and
keep the house in your separate entity as a rental. Your entity's
depreciation will then be based on its purchase price, not your original
acquisition cost. And, of course, "the IRS is fine with this".

comments?
I don't think you should assume that selling to an LLC would be treated
the same as selling to a corporation. An Limited Liability COMPANY is
not the same type of legal entity as a corporation.

So, you should check with both the IRS and your state tax department and
make sure that if you take action it will work to your advantage.

Jerry-the-bookkeeper
 
A

Alan

jerry said:
I don't think you should assume that selling to an LLC would be treated
the same as selling to a corporation. An Limited Liability COMPANY is
not the same type of legal entity as a corporation.

So, you should check with both the IRS and your state tax department and
make sure that if you take action it will work to your advantage.

Jerry-the-bookkeeper
An LLC is going to be a partnership, a corporation or a
disregarded entity. Either way, it is a related party and falls
under the same set of rules as an S Corp. for purposes of this
discussion. Note that the AICPA case study is based on a 25 year
old letter ruling. I am not aware of any other guidance on this
particular set of facts. It basically comes down to whether under
Sec. 121 you can sell to a related party in order to avail your
self of the exclusion and reset the cost basis to the FMV selling
price for purposes of depreciation.
 
I

inky dink

jerry gitomer said:
I don't think you should assume that selling to an LLC would be treated
the same as selling to a corporation. An Limited Liability COMPANY is not
the same type of legal entity as a corporation.

So, you should check with both the IRS and your state tax department and
make sure that if you take action it will work to your advantage.

well, since both a corp (even an S corp) and an LLC are separate legal
entities, I would feel it is a safe assumption that an LLC would receive the
same treatment here as a sub s. And who am I going to ask at the IRS or
state tax dept? That in itself sounds like a whole can of worms, which is
why I would rely on an existing ruling.
 
B

Bill Brown

well, since both a corp (even an S corp) and an LLC are separate legal
entities, I would feel it is a safe assumption that an LLC would receive the
same treatment here as a sub s.
That is a very dangerous assumption, not a safe one, particularly if
the single member of the LLC has defaulted to the treatment of the LLC
as a disregarded entity for federal tax purposes.
 
B

Bill Brown

Why would you do this? Related party rules may or may not apply to
Section 121 but there are related party rules for basis determination
of property inside a closely held entity.
 
I

inky dink

Bill Brown said:
That is a very dangerous assumption, not a safe one, particularly if
the single member of the LLC has defaulted to the treatment of the LLC
as a disregarded entity for federal tax purposes.

so, you recommend using a sub S corp, which is a disregarded entity for
federal tax purposes, but not an LLC which is a disregarded entity for
federal tax purposes. Sorry, I don't get your reasoning. Please explain.
thanks.
 
H

Harlan Lunsford

inky said:
so, you recommend using a sub S corp, which is a disregarded entity for
federal tax purposes, but not an LLC which is a disregarded entity for
federal tax purposes. Sorry, I don't get your reasoning. Please explain.
thanks.
An S corporation is not a "disregarded entity" for federal tax purposes.
It files it's own tax return, and I can personally vouch for that!

ChEAr$,
Harlan Lunsford, EA n LA
 
P

Paul Thomas, CPA

inky dink said:
so, you recommend using a sub S corp, which is a disregarded entity for
federal tax purposes, but not an LLC which is a disregarded entity for
federal tax purposes. Sorry, I don't get your reasoning. Please explain.
thanks.




He's talking about a single member LLC that gets taxed as a sole proprietor.

You can't sell your house to yourself, claim a gain exclusion, and book a
higher basis for depreciation even IF you continued on and rented the house
to an unrelated party.
 
I

inky dink

Bill Brown said:
Why would you do this? Related party rules may or may not apply to
Section 121 but there are related party rules for basis determination
of property inside a closely held entity.
apparently you have not read the article at the link posted by Alan.
 
B

Brew1

well, since both a corp (even an S corp) and an LLC are separate legal
entities, I would feel it is a safe assumption that an LLC would receive the
same treatment here as a sub s.  And who am I going to ask at the IRS or
state tax dept?  That in itself sounds like a whole can of worms, which is
why I would rely on an existing ruling.
On a ruling this old, I don't think there are any safe assumptions.
With an S-corp, you have organizational costs and annual
tax prep costs. With an LLC (btw, good luck finding someone to hold
the mortgage on this sale), you might save some of
those costs but what are the benefits besides a higher basis? All I
see is an exchange of tax savings now for a probable 25%
future tax rate (besides being subject to passive income rules each
year). And either way you have the closing costs of a
home sale--my preference would be to convert without any transactions.

It is an interesting idea and I appreciated the link to the case study.
 
S

Stuart Bronstein

inky dink said:
apparently you have not read the article at the link posted by
Alan.
Letter rulings are issued in district offices, are not approved by
the IRS as a whole, and are not considered precedent in any case
other than the one for which the letter ruling was issued.

In the case of former §1034, recognition of gain was simply deferred.
Since the income of an S corp is generally taxed to its owner rather
than to the corporation itself, they apparently felt it reasonable
that a taxpayer not recognize income at that time when transferring
the property to his corporation. When the property is later sold,
the taxpayer will then recognize all income, including any that was
previously deferred.

In the case of §121, gain is not deferred, it is eliminated. It
looks and smells like a sham transaction.

There's also the issue of §351. How will the corporation get the
money to pay you for the house? Since whatever money used for that
goes from you to the corporation and then back to you, the IRS could
argue that under the step transaction doctrine you're not really
getting anything of any value in exchange for the house other than
the step up in basis on the property. As a result they could claim
that there is no recognition of gain or loss basedon §351.

Stu
 
I

inky dink

Paul Thomas said:
He's talking about a single member LLC that gets taxed as a sole
proprietor.

You can't sell your house to yourself, claim a gain exclusion, and book a
higher basis for depreciation even IF you continued on and rented the
house to an unrelated party.
but, you are not selling it to yourself, you are selling it to a separate
legal entity, the SMLLC. The fact that it is disregarded for federal tax
purposes does not mean it is not a separate entity. Is there any citations
on this point? I have seen some citations with respect to 1031 exchanges
which seem to go against my theory. Of course the safest approach would be
the Sub S, but the LLC has many advantages. Perhaps take the Sub S route,
and then later wind down the Sub S and put the property into an LLC???
 
I

inky dink

Harlan Lunsford said:
An S corporation is not a "disregarded entity" for federal tax purposes.
It files it's own tax return, and I can personally vouch for that!

ah, yes. I see the distinction. However, it is not clear that this
approach will not work for an LLC which is a disregarded entity, as it does
work for a sub S corporation. both are separate legal entities. Of course,
there is no express statement from the IRS on this point, as far as I know.
 
A

Alan

He's talking about a single member LLC that gets taxed as a sole proprietor.

You can't sell your house to yourself, claim a gain exclusion, and book a
higher basis for depreciation even IF you continued on and rented the house
to an unrelated party.
This statement is correct.
 
S

Stuart Bronstein

inky dink said:
but, you are not selling it to yourself, you are selling it to a
separate legal entity, the SMLLC. The fact that it is disregarded
for federal tax purposes does not mean it is not a separate
entity. Is there any citations on this point? I have seen some
citations with respect to 1031 exchanges which seem to go against
my theory. Of course the safest approach would be the Sub S, but
the LLC has many advantages. Perhaps take the Sub S route, and
then later wind down the Sub S and put the property into an LLC???
If you are talking about an LLC taxed as a proprietorship, the courts
have developed the sham transaction doctrine and the step transaction
doctrine to look past things that seem technically legal but in effect
evade tax. This is the kind of situation that the courts could
certainly say would not work the way you'd like (be it with an S corp
or an LLC) since there is no economic reality and no reason for the
structure of the deal than tax avoidance.

Stu
 
I

inky dink

Stuart Bronstein said:
If you are talking about an LLC taxed as a proprietorship, the courts
have developed the sham transaction doctrine and the step transaction
doctrine to look past things that seem technically legal but in effect
evade tax. This is the kind of situation that the courts could
certainly say would not work the way you'd like (be it with an S corp
or an LLC) since there is no economic reality and no reason for the
structure of the deal than tax avoidance.

thanks for your insight. that was certainly my gut reaction when reading on
that website, which is why I came over here for some more realistic
discussion.
 
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A

Alan

Stuart said:
Letter rulings are issued in district offices, are not approved by
the IRS as a whole, and are not considered precedent in any case
other than the one for which the letter ruling was issued.

In the case of former §1034, recognition of gain was simply deferred.
Since the income of an S corp is generally taxed to its owner rather
than to the corporation itself, they apparently felt it reasonable
that a taxpayer not recognize income at that time when transferring
the property to his corporation. When the property is later sold,
the taxpayer will then recognize all income, including any that was
previously deferred.

In the case of §121, gain is not deferred, it is eliminated. It
looks and smells like a sham transaction.

There's also the issue of §351. How will the corporation get the
money to pay you for the house? Since whatever money used for that
goes from you to the corporation and then back to you, the IRS could
argue that under the step transaction doctrine you're not really
getting anything of any value in exchange for the house other than
the step up in basis on the property. As a result they could claim
that there is no recognition of gain or loss basedon §351.

Stu
Everything you say is quite possible but it is not so clear that
this is a sham transaction. Not all transactions between a
corporation and its owners are a sham. Let's say that Sec. 121
did not exist. One could sell their main home for FMV to a
corporation that one owned. The corporation could rent the
property and use the FMV as the starting point for depreciation
of the building. The owner could contribute capital to the
corporation to be used as the down payment for a bank loan. This
doesn't seem to thwart any tax laws.

So.. we are left with whether in the face of Sec. 121, the owner
could avail himself of the exclusion. As there is no specific
ruling on this scenario, one is going to get two opposite opinions.
 

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