Reducing Taxes By Using Deposit To Lower Buying Price
I’m hoping to reduce my tax bill as it’s one of the highest in the US (around 2.1% of selling price) by reducing the selling price. I’d like to offer 1,400,000 but use $50,000 of the good faith deposit to help the builders finish the construction (pay for the landscaping, labor, appliances, carpet and items they haven’t bought yet). Therefore in the contract to buy the property it would be 1,350,000 and I would give them 50,000 as soon as it was signed (or right checks for the various items totaling $50,000). I could do the remainder of 40K as the good faith deposit in escrow. I won’t be closing on the home until they have finished buying ; we’re commited to the home after signing the contract with no contingencies (except inspection which passed with flying colors) so having it in escrow or going to help finish the home doesn’t seem to matter since we won’t be getting it back as it’s part of the sales price. I’ve seen in a sample spec sheet that the client bought all the cabinets, counters, lights, tile and paid for the labor associated with instillation and I assume this was to save on taxes (or the builder charged a lot and he outsourced it).
Have you ever heard of this being done?
Is it a good idea?
I may be saving some on the yearly taxes this way ($1,000/yr) but it may negatively affect me when I sell the home eventually as the buyer will see that I bought it for 1.35 not 1.4 million (what it actually cost).
On the flip side I may be saving taxes every year but when I eventually sell it I would have a bigger capital tax bill (unless I could count the 50,000 I put into it as a home improvement even though it was done before closing on the home). Also perhaps I want the price show to be high as possible (having builder put in all upgrades we want into selling price rather then paying for it later) since there is a lot on the market now and I don’t want to effect the market and show that you can get 15% under the list price as I’d like the market to be strong for when I sell it and to show a that I paid a high price for that time period may increase the value in the new buyers mind 4 years down the road when we do sell.
With an S Corp or an LLC taxed as an S Corp, you can pay yourself a reasonable salary (and still pay the same 15.3 percent tax), but the remainder of your profits will be exempt.
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Quote:
On 2007-05-29 12:41, LeaseOptionKing wrote:
With an S Corp or an LLC taxed as an S Corp, you can pay yourself a reasonable salary (and still pay the same 15.3 percent tax), but the remainder of your profits will be exempt.
This could be read to be a bit misleading. Assuming that the LLC was set up as a partnership for federal purposes, the income or loss will be passed through to the owner (you) and you will pay tax on the profits. I suggest that you seek advice from your tax advisor on the best way to structure this based on your goals and objectives.
Yes, you can pay yourself a REASONABLE salary, but that will be taxed at ordinary income tax rates.[ Edited by finniganps on Date 05/29/2007 ]
Definitely find a good tax advisor and think about keeping the next rehab as a rental for at least a year before selling it.
What was "misleading" about what I stated? Distributions are not used in calculating SE tax. To gain this benefit, you would first fill out Form 8832 (asking the IRS to tax your LLC as a Corp) and then Form 2553 (asking it to be taxed as an S Corp). Your profits would then be exempt from SE tax (except for your salary). With your salary, you would withhold 7.65 percent from your check as FICA and Medicare and match that as the employer (7.65 percent plus 7.65 percent, which is the same 15.3 percent you would have paid in SE tax). But you can write off the employer half.
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Additional info. is needed including:
Who owns the LLC - you and yous spouse, you and an unrelated partner?
How was the LLC created - did one contribute money, anotehr the rental property assets, or something else?
What state is this located in and where are you located?
Where is the LLC registered, or is this a disregarded entity for tax purposes?
Is the LLC treated as a partnership, LLC, S Corporation, C Corp.?
Newkid,
Could you give me a reference regarding suspended losses being added to your basis? I seem to have missed this important fact-
Thanks,
Chris
Quote:
On 2007-05-24 21:09, ypochris wrote:
Newkid,
Could you give me a reference regarding suspended losses being added to your basis? I seem to have missed this important fact-
Thanks,
Chris
IRC §469 (g)(1) is the reference.
[ Edited by finniganps on Date 05/24/2007 ]
Quote:Assuming I have $0 taxable income, does it makes sense to pay cap gains on a $50K gain NOW (in 2008, that is) verses say, on a $100K gain when rates are higher years down the road?Depends upon your timeline. If you are talking only two years down the road (2009 vs 2008), then paying $1932 in capital gains on $50K in 2008 leaves $48068 in your pocket, whereas paying $20K in capital gains tax on $100K in 2009 leaves $80K in your pocket. Personally, I would rather have the $80K but you have to decide for yourself whether saving taxes now is worth forfeiting a higher profit later.
Remember that unrecaptured depreciation is still taxed at 25% regardless of your tax bracket, even in 2008. Of your $50K profit, how much of that is due to depreciation? The capital gains tax rates are applied to whatever profit is left over after your unrecaptured depreciation is taxed.
Instead of "resetting" your cost basis with your strategy and paying some taxes along the way, why not just keep the property? Use a tax deferred 1031 exchange if you feel the need to sell your rental property.
[ Edited by NewKidInTown3 on Date 05/25/2007 ]
No, your original question was whether you can create a taxable event WITHOUT selling the property.
You can sell to anyone you wish to. Pay the capital gains tax and repurchase later. However, since you will be selling to a related party, the IRS may disallow the tax treatment deeming it to be a tax avoidance strategy with no compelling business reason for the sale.
Best to consult a trusted tax advisor on this point.
Since you are married and we assume your wife has income, will you be filing a joint tax return in 2008?