Tax Shelter-- Long
I have a deal I'm trying to put together which could make sense as a tax shelter even if it never made any money. Help me figure out what's wrong here.
Investor has his kids (or some other low-tax person) buy a building and lease it to Investor on a 5 year lease at a 10 cap. Investor then spends a substantial amount of money on tenant improvements under the 5 year lease. Both of these transactions are done with borrowed money so the kids and the investor have maximum losses from interest expense. My understanding is that the tenant improvements can be depreciated over the 5 years not 30. A the end of the lease period the improvements are lost and innure to the benefit of the kids.
The kids then sell the building to me on land contract for an amount equal to their initial investment and the tenant improvements. All the losses go to the Investor all the profits go to the kids.
Granted Investor has to have an intent to profit from operations and not just loose money for tax purposes and there has to be sufficient income over the 5 years that the IRS doesn't rule it a hobby. But can I pitch this as a deal where even if there is no profit from operations Investor still makes a great rate of return after tax (something like 300% over the 5 years)?
Check with your tax advisor to see if the related party rules, when applied to this transaction structure, produce an unfavorable tax outcome.
This issue is outside my expertise.