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PostHeaderIcon Tax News – July 31, 2013

It’s the end of a month.  While I don’t know what August will hold in the store in the tax arena, here’s what happened on the last day of July.

Yesterday I talked about the president’s plan to overhaul corporate taxes in exchange for some more stimulus money.  If there was any question, it became official today when the republicans started blasting the plan.  Mitch McConnell even went as far as saying the proposal might kill tax reform.

Speaking of, it must be a slow news day because tax reform is finally “being noticed.”    Although it looks like that notice doesn’t extend to the Senators who were asked to pitch in their ideas because the ideas that have been thrown in the pile have ranged from vague to non-existent.

This article talks about a way to save some capital gains tax if you have a kid who’s going to school.  Rather than paying for their school, you gift them appreciated shares of stock which they then sell to pay for college.  They then get to use the college tax credit to offset any capital gains they might pay.

Here’s a cool article talking about the state tax implications on player’s who got traded around this year’s baseball trade deadline.  The big winners or losers either came from or went to a state with no income tax like Florida or Texas.

 

PostHeaderIcon Holding Real Estate In a Corporation

Many people feel that the two absolutes in life are death and taxes.  In my experience, if there’s something that comes to close to a third absolute it’s that you should never hold real estate within a structure that’s taxed as a corporation.  I can give you some examples of where it works out okay but still not as well as under a structure taxed as a partnership but I can give you a few different examples of where you can have some disastrous tax circumstances when holding real estate in a corporation.  The primary pair of reasons are basis rules and distribution rules.  As always, I’m keeping this simple so if you have a specific situation that applies to you, be sure to contact a professional.

Let’s say you get a great deal on a property.  You’re able to buy a $1 million piece of property for $500,000 and because of the great purchase price, you’re able to finance the entire $500,000 with  a bank loan.  Let’s take a look at what happens in two years when you try to distribute this piece of property out of your legal entity.

If you bought the property under an LLC that’s taxed as a partnership, you’d be in pretty good shape.  You’d probably (it would depend on the bank note) be able to pass through any losses from the partnership because your debt has given you basis.  In two years, if you distribute the property out of the LLC, it’s a tax free transaction and the property would come through with its basis and carrying period intact.

If you bought the property under a C-Corporation, you’d have a mess.  When you distribute property, it’s the same as if you sold it then distributed the proceeds so you’d have about a $500,000 gain that the C-Corporation would have to pay (plus any depreciation that you took in those two years).  On top of that, the distribution would be taxable to the shareholder at the value of the property or in this case, $1,000,000.  Those two layers of tax that will chew into that $500,000 in savings you picked up when you bought the property pretty quickly.

While not as bad as the C-Corporation example, if you had put it under a corporation that had made a Subchapter S election, you’d still have some tax to pay.  You wouldn’t have any basis in the corporation because the debt from the bank note isn’t eligible as basis.  You’d have the capital gains hit that would occur at the S-Corporation level (which would ultimately flow through to the owner’s personal return) but not the second layer of tax because the dividend would come through half tax free and half as a taxable S-Corp distribution because you’ve established some basis when the capital gain was taxed but not enough to cover the entire $1 million.

In short, putting into an LLC is pretty much a no lose situation.  Putting into a corporate structure, you could have a tax mess on your hands.  Be sure to discuss your personal situation with you tax adviser.

PostHeaderIcon Tax Planning for 2013 – The Long Term Capital Gains Rate

The year 2012 and leading into the year 2013 could be potentially the most challenging year I’ve known to do tax planning.  We have several provisions expiring, we have an election year and we have a fractured Congress.  Word on the street is that very little in the tax arena will be addressed until after the election so we’re looking at November and December to get changes or renewals done before the end of the year.   Based on the current tempo of government, I’d bet we’re hung out to dry but I’ll be looking at some of the rules and how they’ll change if nothing is done.

First we will be looking at the long term capital gain rate.  Right now, the tax rate on long term capital gains is 15% and it’s zero if you fall into the ten or fifteen percent  tax bracket.  If there is no action and the current provision expires, the long term capital gains rate will go up to 20% and it will be 10% if you’re in the fifteen percent tax bracket (the ten percent bracket will also go away).

What does this mean?  You really want to look at your capital gains transactions at the end of the year.  You might want to accelerate the gain on a stock you own to get the better rate and you also might want to defer any losses until 2013 since they’ll be more valuable.  If you’re out of basis in your S-Corporation stock and you want to pull some money out and take the tax hit, you might want to do it sooner rather then later to get the better rate as well.  You also might want to put off a like kind exchange and pay the tax on a transaction knowing this might be as low of a tax rate as you’re going to get.

As always, talk to a tax professional but if you’re sitting on some gains, you want to be extra careful and do a little bit more planning this year than in any other year I can think of.