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Hi, I have a Delaware LLC established for the purposes of

Hi, I have a Delaware LLC...
Hi,
I have a Delaware LLC established for the purposes of consolidating and managing family investments. I am manager and me, my wife and grown children are members.

In light of the attractive tax-free gifting options still in place for 2012, I am considering additional transfers into the LLC this year, with possibility of gifting my shares to children later in the year. I have several questions related to this (keep in mind the probability of gifting to children in 2012):

1) I am considering transfer to the LLC of our primary residence, which my wife and I have owned for approx 20 years. Gain would be approximately $500,000 at current market value. Would it make sense to sell residence to LLC at current market level and capture the $500,000 tax-free gain, then rent from LLC at current market rates? What is proper conveyance to accomplish this? I presume state (in this case, CT) conveyance taxes would be owed?
2) I wish to transfer an investment portfolio to LLC. The investment portfolio shows significant long-term capital gains, some losses. My thinking was to sell portfolio entirely, taking the transaction fees and paying capital gains taxes, then transfer all cash to the LLC. The cash, once in the LLC, would be reinvested in a simpler, but comparable portfolio. (The reason for the sale and repurchase would be to mark the inside basis in the LLC back to the net cash level, paying what I consider more attractive capital gains taxes personally now, and allowing the gift total from this portfolio to be smaller, since it is net of taxes.)
3) I have long-term compensation associated with my employment (deferred compensation, stock options, restricted stock, etc), all of which has calculable current market value. Is there a mechanism for gifting rights on these to the LLC and, if so, what is appropriate conveyance mechanism?
4) Regarding valuation discounts for the potential gifts (of LLC shares): Is it essential to have a certified appraiser conduct the assessment, or would it be sufficient to analyze the gift portfolio discount based on recognized conservative discount levels applied to sections of the portfolio: eg, 25-30% for securities and cash; 25-40% for real estate; 35-40% for active businesses? If the former, can you direct me to a listing of such appraisers?

Thanks!
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Answered in 53 minutes by:
8/28/2012
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!

 

1) I am considering transfer to the LLC of our primary residence, which my wife and I have owned for approx 20 years. Gain would be approximately $500,000 at current market value. Would it make sense to sell residence to LLC at current market level and capture the $500,000 tax-free gain, then rent from LLC at current market rates? What is proper conveyance to accomplish this? I presume state (in this case, CT) conveyance taxes would be owed?

Generally - unless you choose differently - a multi member LLC is treated as a partnership for federal income tax purposes. Thus - if you transfer the property - to the LLC in exchange of partnership interest - that would be nontaxable event - means - the partnership will have the same basis as you currently have and will use your holding period for determination if the possible gain in case of the sale will be a long term gain.

If the partnership will sell the property - it will not be eligible for section 121 exclusion (primary residence).

You may sell the property to the LLC - but that should be real sale transaction - means - the LLC has to pay you stated amount and the title should be transferred according to the bill of sale. If that will not be done and the sale will be nominal - the risk is that in case of an audit - the IRS might object the fact of sale - and the LLC's basis in the property will be your original basis - not an assumed sale price.

Because that is your primary residence - not business or income producing property - I honestly do not see ant reason in having it owned by the LLC...
2) I wish to transfer an investment portfolio to LLC. The investment portfolio shows significant long-term capital gains, some losses. My thinking was to sell portfolio entirely, taking the transaction fees and paying capital gains taxes, then transfer all cash to the LLC. The cash, once in the LLC, would be reinvested in a simpler, but comparable portfolio. (The reason for the sale and repurchase would be to mark the inside basis in the LLC back to the net cash level, paying what I consider more attractive capital gains taxes personally now, and allowing the gift total from this portfolio to be smaller, since it is net of taxes.)

There are two issues - gifting and transferring to the LLC.

For gift purposes - whatever you are gifting - the fair market value is considered. Thus regardless if the asset appreciated or decreased in value - its current fair market value (FMV) at the time of gifting is considered. Thus selling assets and gifting a cash would not make any difference.

On other hand - the donee would need to determine the basis of gifted assets. Generally that would be the lesser of donor's basis and FMV at the time of gifting. Therefore - for appreciated assets - your basis will be transferred to donees, but for assets which value is decreased - it will be their FMV - and you might want to sell such assets to recognize losses.

Selling all asses and repurchase them inside the LLC would be a good idea to have a clear basis inside the LLC. However - you might want to avoid wash sale - if you sell some assets at loss - and repurchase them inside the LLC within 30 days - your losses might be suspended.


3) I have long-term compensation associated with my employment (deferred compensation, stock options, restricted stock, etc), all of which has calculable current market value. Is there a mechanism for gifting rights on these to the LLC and, if so, what is appropriate conveyance mechanism?

If you transfer assets to the LLC in exchange for your partnership interest - that is nontaxable transaction. If you transfer to the LLC - and that will affect other partners' interest - it will be considered as a gift to other partners. Thus you might be required to file a gift tax return depending on the value you are gifting.

If you have retirement account with deferred tax liability - that liability may not be transfered to another person or entity without being recognized by you.

Stock options and restricted stocks are considered assets - as long as you are vested and they are not in the tax deferred account - you may transfer them to the LLC or gift to other person as you wish.
4) Regarding valuation discounts for the potential gifts (of LLC shares): Is it essential to have a certified appraiser conduct the assessment, or would it be sufficient to analyze the gift portfolio discount based on recognized conservative discount levels applied to sections of the portfolio: eg, 25-30% for securities and cash; 25-40% for real estate; 35-40% for active businesses? If the former, can you direct me to a listing of such appraisers?

There is no requirement to have a certified appraiser. However - for gift tax purposes - the IRS directs to use a fair market value. You may hire an appraiser to support your evaluation. That might an issue if the IRS would disagree with your evaluation and you could end up in the Tax Court - if so - the appraiser may certify that his/her evaluation is correct.

There is no discount - you need to use the fair market value for valuations.

For marketable securities - there is no need for an appraisal - we may simply use published closing prices on a specified date. Similarly - there is no any appraisal for cash assets. For real estate assets - you may use real estate appraisers in your state.

The hardest part would be to evaluate the business.

You may see some references here -

http://www.strategicvaluationassociates.com/crosscheck-business-valuation-report.asp

http://www.onlinebusinessappraisal.com/

http://www.businessappraisal.com/

Let me know if you need any help.

Be sure to ask if any clarification needed.

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Customer reply replied 5 years ago

Hi, outstanding response and responsiveness. Thank you. (apologies for my delay in picking this up - my credit card co kept rejecting the JustAnswer transactions following the initial deposits). I had a couple of small clarifications/followups:


on 1) the primary reason I saw selling house to LLC at FMV (with real funds transfer) was to gift it out equally this year to four children, while gift tax exemption remains high. I realize I would need to rent back from LLC at rental FMV. Make sense?


on 2) very clear


on 3) very clear. Could asset transfer be established by simple letter or other deed - or require a new account actually holding securities/options ?


on 4) Thank you for clarifying appraisal process. The "discount" to FMV I was referring to was discounts to an LLC because of lack of marketability (ie, the restrictive covenants, limitations on sale, operating agreements etc, making $1 cash in an LLC worth less than $1 FMV). See for instance http://www.irs.gov/pub/irs-utl/dlom.pdf


I think this would probably fall in the category of valuing the LLC as a business itself, which you do reference. Thanks!

on 1) the primary reason I saw selling house to LLC at FMV (with real funds transfer) was to gift it out equally this year to four children, while gift tax exemption remains high. I realize I would need to rent back from LLC at rental FMV. Make sense?

For gift tax purposes - if the asset is gifted - its FMV is used. You may simply sell the house to your children instead of selling it to the LLC.

Because - there is no business purposes - having the LLC will be just additional overhead.

on 3) very clear. Could asset transfer be established by simple letter or other deed - or require a new account actually holding securities/options ?

If assets are to be transferred to the LLC - you need to establish a new account under the LLC's name and transfer assets from your account to that LLC's account.


on 4) Thank you for clarifying appraisal process. The "discount" to FMV I was referring to was discounts to an LLC because of lack of marketability (ie, the restrictive covenants, limitations on sale, operating agreements etc, making $1 cash in an LLC worth less than $1 FMV). See for instance http://www.irs.gov/pub/irs-utl/dlom.pdf

The issue is that the primary purpose of having the LLC is to inflate the value - there is no business reasons and that is clear based on your explanation - and that will be absolutely clear to the IRS agent in case of the audit. So most likely - based on all facts and circumstances the discount to FMV will be rejected - and you might end up in the Tax Court defending your position that could be costly even if you win.

Accordingly - the qualified appraiser whom you will need to certify in the court will likely reject your offer as soon as all circumstances will be explained.

Because - there is no business activities - and all assets might be relatively easy converted to cash - I do not think that the IRS would agree to grant the discount to evaluation.

Lev
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