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jonacpa
jonacpa, CPA
Category: Legal
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Experience:  Answers to legal questions - not legal advice.
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Tax Free Election on Sale of personal home

Customer Question

Husband and Wife are sole shareholders in corperation and have lived in home owned by the corperation for the past 8 years. If the home is sold can the tax free election be used or do they have to pay caital gains on the gain of the sale.
Submitted: 11 years ago.
Category: Legal
Expert:  jonacpa replied 11 years ago.

The requirements for the exemption are that the selling taxpayer must have "lived in and owned" the house as their principal residence for two of the five years immedicately preceding the sale. Therefore, this sale would not qualify.


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Customer: replied 11 years ago.
Reply to jonacpa's Post: We did live in the house 2 of the last five years
Expert:  jonacpa replied 11 years ago.

The seller must be the owner of the property. You stated that the corporation owned the home. This disqualifies the sale form the exemption.


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Customer: replied 11 years ago.
Reply to jonacpa's Post: I also stated husband and wife were sole share holders. Corperation held title to residence but residence did not yield any income to the corperation or taxpayers and residence served served no business purpose of the corperation or taxpayers. Futhermore, taxpayers(individually or as shareholders of the corperation) owned 100% of the residence during the period the corperation held title to the residence and have taken no business deductions(such as depreciation deductions) with respect to the residence. I need to know if their has been legal ruling in the courts concerning this matter.
Expert:  jonacpa replied 11 years ago.

There have been several rulings in court cases relating to the personal use of corporate owned property. Generally, in the situation you have described, the shareholders have been found to have received "dividend income" or "compensation income" if they have had the use of corporate property without having compensated the corporation for that use.


The assets do not "pass through" ownership to the shareholders; the corporation is a separate legal entity.


This is WELL-ESTABLISHED tax law. Any time that you attempt to attribute ownership of corporate assets to the individual shareholders you not only put yourself at risk for additional tax problems, you put the corporation at risk for having the corporate veil pierced and, thereby, risking the entire setup.


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Customer: replied 11 years ago.
Reply to jonacpa's Post: I am not accepting this as my answer.
Customer: replied 11 years ago.
I want to see some case law rulings on this matter . It has surely has been contested in court.
Expert:  jonacpa replied 11 years ago.

Here is a link to a case that is on point http://www.ustaxcourt.gov/InOpHistoric/moran7.TCM.WPD.pdf


And here are several links that discuss this general situation. Please note that in EVERY case, shareholders are instructed NOT to use corporate assets without compensating the corporation and that personal use of corporate assets can lead to piercing the corporate veil.


http://www.expertlaw.com/library/business/corporate_veil.html
http://www.clickandinc.com/corporate_veil.asp
http://www.castlelaw.com/dodont.htm
http://www.rpifs.com/protection/apcklist.htm
http://hushmoney.org/corporation-sole_myths.htm


I am sorry that this is not the answer you want, but anyone who tells you differently is leading you down an extremely dangerous road regarding your tax situation.


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