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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3899
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am a non resident who owns an investment property in CO held

Resolved Question:

I am a non resident who owns an investment property in CO held through a LLC which in turn is held in a off-shore entity.
Property purchased 3 years ago for $300,000 now written down to $275,000 in the books of the LLC.
Todays appraisement value $500,000
We wish to sell the property to an Un-Related USA resident and taxpayer for our original purchase price of $300,000.
Should the transaction be made:-
Question A. Would the LLC be liable for any Capital Gains type tax on the difference between book and appraisement value?
Question B. Further, would there be any Donations or Gift tax implications for the LLC on the difference between book and appraisement Value's?
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Lane :
Question A. Would the LLC be liable for any Capital Gains type tax on the difference between book and appraisement value? Capital gains tax to the members (LLC is a a passthrough and pays no tax at the LLC level) will be based on sales price minus adjusted basis .. has nothing to do with appraisal value
Lane :
Question B. Further, would there be any Donations or Gift tax implications for the LLC on the difference between book and appraisement Value's? - Only if IRS thinks that this is being (below market value) as a means to ESCAPE gift taxation ... However, given that the lifetime gift tax exclusion is $5,120,000 this may not effectively be an issue anyway

 

Lane :

U.S. citizens, resident aliens and domestic corporations are subject to taxation on their
worldwide income, including real estate income. United States citizens and resident aliens are
also subject to a U.S. estate tax and gift tax on transfers of their worldwide assets, including
real estate.

Lane :

A primary planning tool available to certain Foreign Investors is their
ability to rely on a United States tax treaty that may exist with the Foreign Investor’s host
country. This type of tax treaty will assure that there is no double taxation between the two
countries.

Lane :


Income will only be taxed at the maximum highest rate of both countries. Treaties may also
provide for the prevention of double taxation under the estate tax laws of the two countries,
reduce or eliminate the Branch Tax and generally reduce United States taxes on the Foreign
Investor’s interest, dividends and business income that are earned from U.S. sources.

Customer:

Are you saying that although the property is appraised at $500,000 capital gain tax in avoided totally in this transaction? further I was under the impression that no private us citizen can receive more than $100,000 in any tax year

Customer:

I meant $100,000 per annum in gifts per tax year

Lane :

Ok, a couple of things ... the 100,000 you are referencing is the DECLARATION (not a tax form, but rather a money tracking form that IRS provides to treasury, for the purposes of tracking money flows from outside the to inside the US i.e., money laundering, drugs, arms trade, etc) this is a required form but is an informational form that generates NO TAX ...


Form 3520 - Internal Revenue Service

Lane :

And yes, if you are only selling for what you have in the property, there is no gain

Lane :

Gains is sales price minus basis

Customer:

Thank you

Lane :

YOU are very welcome

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane :

By the way, the links I have provided, bith to te IRS guidance AND the 3520 from will stay active for you

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3899
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.


Thanks!

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

OR you can add me as a preferred expert on your home page.

Regardless, thanks again for the rating!

Lane
Customer: replied 10 months ago.

Lane, it strikes me that when you say selling a property at cost and well bellow market price does not generate Capital gains tax would show a big hole in the Tax code as a first generation buyer at 100 could sell to a Beneficiary say 20 years later at cost. This second generation buyer could sell on say 30 years later to a further beneficiary at cost and so it could go on forever not withstanding the value of the property now being in the millions??

Expert:  Lane replied 10 months ago.


Your logic is compelling, but you are "commingling," if you will two different tax systems.

(1) the income tax system (taxation of earned and other income to one person, such as wages or a capital gain on sale of an asset).

and

(2) the gift & estate tax system ( a transfer tax system charged against gifts and estates -that final gift)




Capital gains are, as I mentioned above, simply a tax on the gain made on sale (to oversimplify a bit - sales price minus original investment).

Gift and estate transfer tax is charged on assets being transferred to another person without the expectation of anything in exchange.

Also, as I mentioned above, if you sell something to someone to someone at a price that's SO FAR below fair market value that the IRS deems it unreasonable (a price no reasonable seller would accept) they may recharacterize a part of that amount as a gift.




Make sense?
Customer: replied 10 months ago.

Thank you once again. I know I was co-mingling a bit but the situation is real. I do wish to sell to someone at 300,000 when in this case there are comp's at 500,000! -- similar apartments in the same building on offer!


I was just afraid that the seller, the LLC, bearing in mind that the holding Co is offshore, would be presented with a bill from the IRS for either the Capital gains on the 200, 000 of so-called "under market" value or alternatively get billed for Gift tax on a similar amount. The person in question is close friend whom I wish to assist get into the property market with an advantageous deal without prejudicing myself further than the discounted price!


I assume from your answer that I would be I the hands of a judgement call by the IRS as far as a gift tax burden was concerned in this particular instance, but I could be totally clear as far as Capital gains are concerned.


The seller in this instance has no exposure to tax with any country which the USA has double taxation agreements.

Expert:  Lane replied 10 months ago.
No, again. You'll have no capital again at that price unless you have been depreciating the property and lowered the tax basis that way.

Further, there is a lifetime exclusion on gift taxes of $5,250,000, so unless you have already gifted $5,050.000. You'll have no gift tax either.

Customer: replied 10 months ago.

Again thank you Lane,


Apologies for dragging this on but I am still not completely clear in my mind.


I was under the impression that the Life Time exclusion of 5.25M applied to the recipient.


However are there not different rules and limits on the donor? I understood that the limits placed on the Donor were different and that Donations or Gift tax was levied against the donor when certain annual amounts to an individual were exceeded.


I know that if this is the case it would only apply to a USA resident Donor.


The LLC is the taxpayer, owner, and a USA resident structure. Would it not be liable for the Gift/Donations tax obligations if there are any in this instances ?


Tony

Expert:  Lane replied 10 months ago.

Hi,

No problem at all,

You said...

"I was under the impression that the Life Time exclusion of 5.25M applied to the recipient."

No, gifts are excluded from income for the recipient and the GIVER (Giftor) always pay the gift tax.... with the exception of the last gift, the estate transfer, but that too is taxed NOT to the receiver (the heir or beneficiary, in this case) but to the estate of the decedent.(in essence, another type of giver)

This offers a chance to see how the unified gift & estate tax system is, in deed, a UNIFIED system ... The lifetime exclusion on gifts (once a person passes away) is netted against the estate tax exclusion (the same amount, $5.250,000) to see if any of the estate has to pay any estate tax.

Example: If I die today and I have gifted a total of $3,000,000 during my life ... My estate will only be able to exclude $2,250,000 from the estate tax. (The GIFT TAX and the ESTATE tax are the same tax ... taxed when the money changes hands and there's no exchange or sale(gifts and estate transfers).

The capital gain tax is a totally different tax, an INCOME (rather than a transfer) TAX .. taxed to an individual when he sells an asset for more than he paid.




You said:

"However are there not different rules and limits on the donor? I understood that the limits placed on the Donor were different and that Donations or Gift tax was levied against the donor when certain annual amounts to an individual were exceeded."

THe donor (giver - giftor. in IRS terminology) is the ONLY PERSON that has a tax, when it comes to gifts or estates .. again the receiver of a gift does not pay the gift tax, AND gifts are excluded from any INCOME taxation.



You said...

"I know that if this is the case it would only apply to a USA resident Donor"

Again, that part IS exactly right .. in US estate and gift tax law, the GIVER (or the estate of the decedent) pays the tax .. but again there IS that lifetime exclusion of $5,250,000.

Thank you for reminding me that you are non-resident; Gifts of U.S. situs tangible or real property in excess of the annual exclusion gift tax amount are taxable.

Further there is a DIFFERENT gift tax exclusion for non-resident aliens and it is somewhere around $140,000 (it was indexed to 139000 in 2012)

I'll get that for you.

And finally on the LLC, the LLC is a passthrough meaning that the taxation is passed through to the owner. The LLC itself pays no taxes.



But before we can go further I think it's important to understand that (1) there will be NO capital gain tax here ... and (2) the only way that there might be a gift tax issue if the IRS says that you've sold it so far below market that it was in all reality a gift (or at least some part of it was)


... be right back with that annual exclusion for non-resident aliens

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