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Based on my research, I was wondering if I purchase a car

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cash for 7,000 dollars and...
Based on my research, I was wondering if I purchase a car cash for 7,000 dollars and the market value of the car is 12,000 will it still be considered at arms length transaction. For example, I purchase the car cash for 7,000 from a dealer through my LLC
then I buy the car from my LLC at 7,000 from a auto loan. Will I be in the clear because I purchased the car from the LLC at the same price the LLC bought the car for. Furthermore, if the IRS thinks that a transaction is not at arms length what is the consequences
of that? Is it further tax that would be owed on the sale?
Submitted: 2 years ago.Category: Finance
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10/18/2015
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 2 years ago
Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2,608
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Dear Friend,

YES.. Most likely it will be considered at arms length transaction. The reason is that you may have purchased the car from the dealer at lower price or acquired for free. But from IRS point of view, the transaction starts from your selling to the LLC which is nearly 40-50% below the Market value. Even if the LLC sells back at same price, there is HIGH likelihood that the transactions is defined at a arms length transactions.

The key problem is, from IRS point of view, they will begin with YOU selling car at much less than the Market value. They are not bother how and at what rate you acquired it.

So, it is most likely to be defined this way.

I am sure this would help. I wish you good luck.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards

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Customer reply replied 2 years ago
OK. So basically, when I purchase the car from the dealer at 7,000 dollars that transaction is not included from the IRS point of view. To define the at arms length law they are looking at the transaction between the LLC and myself. Let me fully explain the entire transaction. I buy car from a dealer not personally in my name but through my LLC. Then I purchase the same vehicle from my LLC in my own personal name. Based on what you said, if I sell the vehicle to myself from my LLC at full market rate which is 12,000 in this case it is legal. For example, I purchase car from dealer cash through my LLC. Then I buy vehicle from my LLC at 12,000. But I finance the purchase through my personal name. I use my personal name secure the auto loan against the 12,000 purchase price from my LLC. You mentioned that the IRS would begin with me selling vehicle below market value. What exactly did you mean? In the scenario I described before. It was my LLC purchasing the vehicle for 7,000 dollars from the dealer even though the market rate is 12,000 dollars. I then personally secure a auto loan in my name to purchase the vehicle personally at the 7,000 dollar purchase price.I just want to know which transaction is looked at more favorably by the IRS or it doesn't really matter. My LLC selling the vehicle to me at the market rate of 12,000 dollars that I secure from a auto loan. Or my LLC selling the vehicle to me at 7,000 dollars which is below the market rate?
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 2 years ago

Dear Friend,

Hello and welcome again. Thank you for your reply.

Let me make this simpler. It does not matter if you purchase the vehicle from the dealer directly or through your LLC. It does not matter if the LLC acquires the vehicle by cash or finance. WHAT MATTERS is the transaction between YOU and the LLC IRRESPECTIVE of the acquisition value paid by the LLC to acquire the vehicle.

WHAT MATTERS is the rate / value at which the transaction takes place between you and the LLC. If it is BELOW the fair market value IRRESPECTIVE of its cost to LLC, it will be taken as arms length transaction, entered into to benefit the either party, in this situation, YOU. It further does not matter if you pay cash to the LLC or secure the title in some other way. As I repeat, it is the value of the transaction between YOU and the LLC that matters and can be taken as arms length transaction if entered significantly below the market value.

I am sure this would help. I wish you good luck.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,

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Customer reply replied 2 years ago
What if the transaction between me and the LLC is not entered into significantly below the market value. What if the
transaction was entered between me and the LLC was at the market value. Would it still be considered at arms length transaction. I just want to make sure I understand everything so I know the transaction will be legal in NYC.
I want to enter into the transaction at market value. So I will purchase the car from the LLC at market value. It would be a gain for the LLC then vs a gain for me like what you said previously. Will it still be considered at arms length? What would not make a transaction considered arms length and what is the consequences of that. Is it extra taxes that would be owed to the government.etc. When will the transaction be considered illegal?
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 2 years ago

Dear Friend,

Hello again.

NO, if the transaction entered into by you and the LLC is around the fair market value, it will NOT be considered as arms length transaction. So long as you deal at Market value and DO NOT design this transaction for a personal benefit or any kind or with intention to avoid any taxes, you can go for this and structure this transaction. It will not be illegal to do so. So long as being structured around its market value, it should not create any problem for you.

I am sure this would help. I wish you good luck.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,

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Customer reply replied 2 years ago
What do you mean exactly by personal benefit? If the LLC purchased the vehicle for 7,000 dollars and it is worth 12,000 dollars and the LLC sell me the vehicle for the 12,000 dollars. That would be a benefit to the LLC that I own of 5,000 dollars. Would that be considered legal as long as I stay at market value, correct? Even though this transaction is no longer at arms length since it is at market value, I can still conduct this transaction?
Financial Professional: Rakhi Vasavada, Financial and Legal Consultant replied 2 years ago

Dear Friend,

By personal benefit means -- to the benefit of the either party, ie you or the LLC.

So, so long as you stay at market value, nothing should create a problem for you. You can still conduct this transaction.

I am sure this would help. I wish you good luck.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,

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