How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Christopher Phelps Your Own Question
Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
84937
Type Your Tax Question Here...
Christopher Phelps is online now
A new question is answered every 9 seconds

Taxes

Customer Question

I am getting ready to close on a Real Estate Deal that will profit me around 1.8 million dollars. I need advice on how I can Legally shelter as much as possible from the IRS and avoid paying most of it to taxes.
Thank you.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Assuming your property was not subject to an involuntary conversion (i.e. the Government condemned and took it over), you may be able to defer recognition of the gain if you follow the rules for IRC Sec. 1031 exchanges. In your situation it appears a deferred like-kind exchange (i.e. a Starker exchange where you sell your property first and then reinvest the proceeds) would be most appropriate. Of course this necessitates that you reinvest all of your proceeds (i.e. profits and basis) in the new property.


For a Sec. 1031 deferred like-kind exchange you will likely want to use an exchange accomodator (other types of intermediaries are available) to hold the proceeds from the sale of the property and to purchase the new property. No money must be received (or constructively received) by you during any part of both transactions. To the extent you do, you will be required to recognize gain.


Sec. 1031 requires that within 45 days of the sale of your original property that you identify (via letter to the exchange accomodator) your replacement property. You may identify up to 3 replacement properties whose value is not more then 200% of the value of the property sold. You must also complete the purchase of the replacement property within 180 days of the sale of the old property (or if earlier, by the due date of your return including extensions for the year in which the sale took place).


Further, you must place debt on the new property in an amount at least equivalent to the debt that was on the old property. Otherwise, a decline in subject debt will be considered as money received and thus taxed as capital gain (or ordinary income if depreciation recapture is applicable).


You may want to review the Like-Kind Exchange section of IRS Pub. 544 at http://www.irs.gov/publications/p544/index.html for additional information. Also, check with your escrow company or the attorney handling the transaction to see if this avenue is available. Either should be able to refer you to a qualified imtermediary.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Unfortunately I cannot due the 1031 because we are selling a contract to a parcell of land and their are 4 partner in the LLC. Each one of us will disburse our profits evenly and thats where I need to figure out what to due.
Thanks Joe
Expert:  Christopher Phelps replied 11 years ago.

If the LLC owns the land directly, you may consider distributing the land to the partners as tennants in common interests (i.e. each of you has a 25% separate interest in the property). Then you may do a 1031 exchange.


If instead you just own an option contract to purchase the land and you are selling your rights to buy, then there is no way to defer recognition. IRC Sec. 1031 deferral is not available for intangible property including contract rights.


Practically, under the current tax code, the only way to defer recognition of gain is to generally, not receive the money. There are many ways to accomplish this starting with completing an installment sale where you elect to receive the proceeds over time. Alternatively, there are a number of ways to structure corporate transactions and reorganizations so that you can transfer property from one entity to another without gain recognition. Obviously, to attempt something like this you need to have professionals involved. Also, if you follow through with this scenario, you would likely end up trading your interest in the property for an interest in another entity (i.e. corporate stock, etc.) and would not have the cash available for other use.


Depending on the nature of the property you may be able to use capital gains tax rates (i.e. max 15% Federal) which are historically low right now. You may be better off biting the bullet and paying taxes at low rates now, then deferring gain recognition and paying later. I suggest you consult with a tax professional immediately to see what your options are. More facts can be reviewed in a face-to-face forum and more complete answers given. With $1.8M in gain and upwards of $300,000 in tax liability, it behooves you to pay some money to a qualified professional before you sign on the dotted line.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Chris,
in your opinion do you feel their is a chance that Federally my share can be considered as capital gains? Not fact just opinion...
Thanks Joe
Expert:  Christopher Phelps replied 11 years ago.
I need to know what it is exactly that you are selling? How long has the LLC held the property? Also, did one or more of the partners contribute the property to the LLC or was it acquired directly by the LLC? I assume the LLC is treated as a partnership for tax purposes.
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: We are assigning our rights to a contract that we are in to purchase a piece of land in Tampa Florida to build a high rise Condominium Tower. The property(contract) was purchased directly through the LLC. Yes it is concidered a partnership.
Thanks
Expert:  Christopher Phelps replied 11 years ago.

From this distance its difficult to tell because I do not know all the facts.


In order to be eligible for capital gain treatment, the asset sold has to be a capital asset. A capital asset is generally an asset held for personal or investment purposes. Generally, assets used in a trade or business or property held for sale to customers (or will become property held for sale to customers) or property acquired in the ordinary course of your business, is not eligible for capital gains treatment.


A contract for a right to develop implies that you are in the business of developing real property. If you originally acquired the contract in order to develop the property, if your trade or business is the development of real property or if your contract just refers to the right to develop and does not represent ownership of real property, all these things will swing the character of the gain in your hands. Based on the above I suspect your gain will likely be ordinary, but its an educated guess not based on all the facts.


I really believe all of you should engage a qualified professional who can get their arms around all the facts. This will allow a more thorough analysis of your situation which should result in at least your making educated decisions about how to proceed. With $1.8MM at stake don't pinch pennies, get some real professional help that yo can sit down across a table from.


Also, while FL does not have an income tax, obviously NY does. If your a resident there, they will also tax the transaction.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Previous | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    577
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    577
    10 years experience
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    1245
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3882
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/TA/TaxRobin/2013-8-28_16186_femalebusinessprofessionalbinderhand11038485.64x64.jpg Robin D.'s Avatar

    Robin D.

    Senior Tax Advisor 4

    Satisfied Customers:

    11072
    15years with H & R Block. Divisional leader, Instructor
  • http://ww2.justanswer.com/uploads/YI/yirtual/2015-3-12_43754_egan.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    8621
    Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2884
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/FA/fastfile/2011-12-15_23139_Klein2011small.64x64.jpg R. Klein, EA's Avatar

    R. Klein, EA

    Enrolled Agent

    Satisfied Customers:

    1837
    Over 20 Years experience