Q-1:

Subject: RE: Sale of Personal Residence

Kerry,

 

I’m puzzling over this discussion.

 

I’m not sure when the questioner is assuming Sec 121 kicks in.

 

When is the property “sold” for purposes of Sec 121: when “sold” to the LLC for the note or when the units are sold by the LLC? For tax purposes the LLC is disregarded so is it possible to even “sell” to the LLC from the IRS point-of-view?  Would the answer be the same or different if an S-corp were used in that it is a unique “person” under the law?

 

In my case I am considering transferring my personal residence condo to an LLC or S-corp and converting to a rental and would want the liability protection of the LLC or S-corp; but how/when would it be reported to the IRS for purposes of Sec 121? Or would I lose the benefit of the Sec 121 exemption if I hold it for rental beyond three years after converting it to rental?

 

I’ve searched everywhere and this question is the closest I’ve come to a discussion about this scenario. I can’t find anything on the IRS site that seems to give a definitive response.

 

Thanks,

A-1:

The gist of that Q & A was to highlight the fact that the Section 121 exclusion is available to be used when a home is sold outright to a related party.  According to the IRS Pub quote, the only time it’s not available is when a remainder interest in the home is sold.

This means that a sale to a controlled C or S corp would be eligible for the Section 121 exclusion, assuming all of the normal conditions are met.

As always, you should be working with an experienced tax professional before setting up any of these kinds of transactions.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

 

Thank-you for your reply. You didn’t say but I take it from your reply that you don’t think that sale to an LLC would qualify for Sec 121 treatment; is that correct?

 

Can you recommend a tax professional in Denver, or anywhere, that is competent and can answer questions? I have tried to find one to discuss this with and have not been able to find anybody that knows what they are talking about. Or maybe they just want to deal with the easy and usual.

 

Twice I was referred to the related party rules that govern 1031 exchanges. When I pointed out I wasn’t looking at a 1031 exchange they both told me the rules still apply to my case. When I asked where in the regulations I could find that they just said its too complicated and I don’t want to get into it. In response to my questions I’ve been asked why I want to do it, told not to do it, sell it to a third party, etc. etc. but never just an answer to my questions. So I go hunting through IRS pubs and the internet trying to find answers.

 

I want to explore my options: where do I find someone who is competent and can answer questions?

 

Thanks,

A-2:

Actually, it was the opposite.  That sale to the LLC should qualify for the Sec. 121 tax free exclusion. 

There are obviously some gray aspects to this issue. For example, a sale to an LLC that is being reported on the owner’s Schedule C (disregarded entity) would probably not qualify; but a sale to an LLC that files its own 1065 or 1120 should be okay.

The rules for related parties are stricter for 1031 exchanges than they are for primary residence sales.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

Q:

Subject: Leasing semi-trailers

 

Mr. Kerstetter,

 

I have been in the semi-trailer leasing business for over 17 years.  Naturally one of the biggest obstacles I face on a daily basis is competing against the bank or other financial institutions who offer typical financial arrangements, conditional sales or leases with purchase options.  The arrangement we offer is an operating lease.  Most companies seem to want to own the asset and shy away from the operating lease.

Is there any way to target companies that an operating lease would be to their advantage?  Also where could I go to find out further tax advantages of leasing vs. owning and have it presented in laymen’s term for the sake of an easy, understandable presentation.  Any help or suggestions you might have would be greatly appreciated!!

A:

There really is no universal answer to the lease versus buy question.  It really boils down to the terms involved in a particular deal, especially the interest rate built into the lease payments.  As I’ve mentioned on several occasions, I am not a fan of leasing cars and trucks because the leasing companies often have interest as high as 30% built into the payments.  Comparing that to the interest charged on normal purchases makes that decision practically a no-brainer.

Other than the Section 179 expensing allowance for purchases, the tax breaks between leasing and depreciating are pretty close to the same for each.

From a business and financial perspective, one of the selling points for leasing instead of buying is the ability to often keep the debt off of the company’s balance sheet, improving the important debt to equity ratio.  We covered this point 33 years ago in my college accounting classes and it is still used today.  In fact, I remember stories about Enron, before it crashed, mentioning how they artificially kept their debt levels low by leasing assets from subsidiaries and other entities that were owned by Enron executives.

I’m sorry I couldn’t be more help.

Kerry Kerstetter