Tax Guru – Ker$tetter Letter

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Archive for February 1st, 2006

Minority Stock Ownership

Posted by taxguru on February 1, 2006



I was wondering if you could tell me what power I have as a 30% owner, with one other owner at 70%.  The other owner is my father and he is not doing the job he should be doing as the President of the corp.  Do I have any legal control or say in the operation of our business?

Please help!


You will need to work with an attorney on this matter.  S/he will need to see all of the documentation for the corporation and the issuance of the stock, including any governing documents that set out the legal and fiduciary responsibilities of shareholders and officers of the corporation.

If you don’t have any such written documentation, you may be SOL since anyone owning over 50% of a corp can usually run the show.  You then have the choice of selling your shares, subject to any restrictions in the corporation’s governing documents.

Good luck.

Kerry Kerstetter


Posted in Uncategorized | Comments Off on Minority Stock Ownership

Jointly Owned Property

Posted by taxguru on February 1, 2006


Subject: HELP Please!  Re: Reverse 1031 Exchange
Hi, I must open this by saying I am very embarrassed to ask this as I have an MBA and really should not have let myself get into this predicament.  Here is the situation – perhaps you can offer some sound advice.
My father passed away in 1988 leaving his only heirs – myself, my younger sister and my developmentally disabled brother his very modest home (he did not have a will). 2 years later, I moved another disabled man in with my brother and they became involved in an Independent Living Program that offered life-skill assistance (and supplemented their “rent” – which basically covered expenses – property taxes, utilities and upkeep.)  The 2 men lived in the home until 2005. In late 2004, I took out a home equity loan on this home (#1) to purchase a new home (#2) for them (for $270K) in order to move them closer to my sister and myself.  House #1 was on the market for several months (unoccupied) and finally sold 5 months later for ($402K) — it is located across the street from the bay at the New Jersey shore and the land is suddenly quite valuable.  The dilapidated home itself was leveled by the new owners to build a new house on the lot. I went to settlement to sell House #1 with my sister (with a Power of Attorney for my brother who is mentally 6 years old).  We signed papers for about 4 hours – while the buyers read every word and signed 3 or 4 different sets of mortgage papers and their infant cried the entire time.  When it was all over, it was almost 3:00 pm and my 9-yr-old son was due to get home from school and would be home alone.  The Title Company handed me a check for the FULL AMOUNT of the sale of the house (less closing costs) — I grabbed it and ran out to get my son.  When I got home, I called the mortgage company that held the home equity loan (on home #1) asking to whom I needed to send the check to pay off the loan.  They said I needed to go to the bank and get a cashier’s check to pay it off and send it to them.  They were confused as to why the Title Co. did not see them as holding a Lien on the property.  All the while, I had no idea that I should have been doing a 1031 Reverse Exchange on these two properties to avoid the payment of capital gains taxes.
What can I do now?  I paid the Home Equity Loan off as well as another Equity loan that we had on home #1 – (to pay for siding and windows, a new bathroom and carpeting the year before.)  There is no money left over and I certainly do not want to pay gains on $402K.  Please advise if you can – I am really freaked out after doing some research on the Internet about this and realizing that I did not do this properly. My family (sister and brother) rely on and trust me to handle everything and I hate to think that I have totally screwed up.  Is this something that can be rectified after the fact??? 
I appreciate any help you can offer!  I was actually considering calling the IRS to set up an appointment to talk to them about this.  Then, I saw your site.  Thank you very much,


You do have a messy situation here.  Asking the IRS for advice would be a crazy thing to do.  You need to remember that their job is to make you pay more taxes.  They do not want to help you lower them.  You need to work with a professional tax advisor who can thoroughly analyze all of the many factors involved here for you and all of the property’s co-owners.

Doing a 1031 exchange on the old house is not possible. You have received the money; so it is now a sale and cannot be converted into a tax deferred  exchange, regardless of what happens to the money.

Some of the issues that need to be analyzed and evaluated with your personal professional tax advisor will include the following.

What was the cost basis of the old home?  Normally, inherited property is given a stepped up costs basis to its fair market value as of the date of your father’s passing.  Any capital improvements made since then can be added to the cost basis.

Whose names were on the title of the old home?  If you brother’s name was on it, his share of the profit could possibly be excluded since it was his primary residence.  These rues are explained on my website.

How was the old home being reported on each of the owners’ income tax returns?  Has anyone been claiming depreciation on it?  If so, that has reduced the cost basis and increased the taxable gain.

Good luck.

Kerry Kerstetter


Dear Kerry: 
Thank you so much for taking the time to consider and answer my question.  I realize that calling the IRS would be insane.  I have made a call to an accountant and left a message for him to call me when he gets in. I am going to discuss this with him in detail as you suggested.  I did consider that my brother may not have to pay any gains on his share as it was his primary residence and he is entitled to up to $250K in profit from the sale of his home. Is that right?  I am going to go to the link to your site you mentioned and read it carefully.  (But does it matter that the new home is in just my sister and my name?  We decided that although it is for him to live in until he dies, it was just too difficult to get his name on it and stuff due to his limitations. In other words, does the money he gets from the sale of his primary residence HAVE to go into the purchase of a new primary res.?) My sister and I did alternately claim the rental income and therefore did depreciate it – as you mentioned. However, we also did put quite a bit of capital improvements into the house and have every receipt for the entire 17 years. I really do not know how to figure out the cost basis of the old house though. We did not have it appraised in 1988 and the property taxes were probably based on it’s worth being about $100K. (I wasn’t about to question that at the time.) Perhaps insurance records showing what we insured it for (for replacement value???) — but that probably was not too much either. Trying to figure out fair market value for a property 17 years ago may be a bit tough.  Perhaps there were sales in the area that I can research. As I said, the house has been demolished so it may be hard to prove that it was worth more or less than houses in the area.
I wish I had contacted you before we did all of this (or someone who is an expert in this) — hopefully, the accountant I have contacted will have some kind of creative thoughts on the best way to do this without losing our shirts. If you come up with any alternative thoughts, please pass them along!  I have only tried to do what is best for my handicapped brother and I feel like we are going to get screwed royally by the IRS.  Not to mention, my sister will probably never talk to me again if I hit her up with a large tax bill due to my stupidity!

Thanks again,


If you read the info on home sales, you will note that requirement to reinvest into a new home was repealed in May 1997; so it makes no difference whether your brother ever buys a new home in his own name.

I am confused on your cost basis issue.  If you have been claiming depreciation, you must have already set up your cost basis of the home on your depreciation schedules, which have been attached to your 1040s.  You will probably be stuck with that figure; but your personal professional tax advisor will be able to see if that’s the case.

Good luck.

Kerry Kerstetter



Dear Kerry – I met with my accountant yesterday and you were correct — the fact that my brother was one of the owners and resided there for more than 2 years (17, actually) allows him to declare the $250K w/o having to purchase another primary residence.  Also, the depreciation (about $43,000 over the 17 years) will come off of the original cost basis.  But, I have found some like-properties from the local tax office from 1988 and have 5 comps to the house we sold that bring the total to just about $250K  (Fair Market Value in 1988, less depreciation, plus capital improvements over 17 years, which I have ALL receipts for) — therefore, my Accountant will file a return for my brother claiming the sale of the property and we should be ok. (He did say keep everything for 3 years just in case it comes back to haunt us.) He also agreed with you in that trying to do a Reverse 1033 now is a huge mistake and will only raise BIG red flags with the IRS.
This is all so good to know as my husband and I are in the process of selling an investment property in Fla. and buying a condo instead.  All of this info will come in very handy next month when we settle — better late than never, huh?  Once again, thank you for your time and advice.  I will stay tuned to your site – it is very informative.
As a quick aside — my husband jokes with me that even though I have an MBA (graduated with full honors too!), I am educated way beyond my intelligence — or so he says.  This whole mess may just prove him to be right!
Have a great day! 

Oops – I meant 1031 not 1033, see what I mean?



I’m glad to see that you’ve found competent professional tax help.

The one piece of your puzzle that still confuses me is how you were able to claim depreciation for all of these years without establishing your inherited cost basis on the first 1040 where you showed it as rental property.  If you are now going to change that figure, your tax preparer will need to attach an explanation to the 1040 as to why you have been using the wrong cost basis for so many years.

Taxes are a very specialized and complicated area.  Having an MBA or even a CPA doesn’t make anyone an expert.  There is no substitute for real life experience working on tax returns and with their related issues, including audits.

Good luck.



Posted in 1031 | Comments Off on Jointly Owned Property

Posted by taxguru on February 1, 2006

There Is No ‘Number’ That Guarantees a Secure Future – Fox News review of Lee Eisenberg’s retirement planning guide.



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