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Avoid Capital Gains
| What is a Corporation? The first prerequisite is to set up and have a corporation legitimately and actually doing business in a state like Nevada. For the sake of discussion we are going to call this corporation Tax Savings Inc. The plan involves the use of two Corporations. The second corporation we will call Property Inc. How does the plan work? You, the property seller, for the sake of discussion, will send the property through escrow at the approximate book value of $50,000 to Property Inc. A title insurance policy is issued to Property Inc. Now Property Inc owns the property, and you, the seller own the stock in Property Inc. There are no capital gains because you did not profit from the trade. Next, Tax Savings Inc acquires Property Inc from you by purchasing the stock of Property Inc for the sum of $50,000, and issues you a demand promissory not in payment for the stock. This is an interest bearing note, even though your paying it to yourself. It is profit for Tax Savings Inc and a personal deduction to you. Remember Tax Savings Inc profit is in Tax Free Nevada. Now Tax Savings Inc owns Property Inc. Property Inc owns the real estate property, and you own Tax Savings Inc. Where you are or where the property is, can be anywhere. It is immaterial. How do you flip the property? Now comes the buyer. Tax Savings Inc sells Property Inc to the buyer. You do not sale the real estate property; you sell Property Inc., which owns the real estate property. You sell it for .... $150,000. Tax Savings Inc has a $100,000 capital gain or profit, and Tax Savings Inc is a Nevada resident. No state capital gain tax, no state income tax on corporations. No state has any claim against the profit of a Nevada Corporation. There is no state tax on it. It's the American Way. By eliminating the cost of escrow, transfer fees and taxes, you more than paid for the cost of your Nevada Corporation. Remember that Tax Savings Inc and Property Inc never sold the real estate property. Instead they sold a corporation which owned the real estate property as it's single asset. There is no re-appraisal of the tax base. There are no escrow, no records. Nothing at all. The real property did not change hands. What changed hands is the stock of the corporation. Reporting real estate sales is required by the broker, escrow agent or attorney handling the deal. So now you have learned not to sell real estate but to sell corporations. The stock of a corporation can be sold on terms or conditional sales contracts just as real property can. The corporation can obtain financing for the property the same way as an individual can. In tougher situations, the shareholders can guarantee the financing to the lender if necessary. What if Property Inc needs money? If Property Inc needs money to make it's payments on the property, the shareholders simply buy additional stock in the corporation. This money is a capital contribution to the corporation and is not in any way taxed. What about a Foreign Qualification? This single transaction in California and all other states, by Tax Savings Inc and Property Inc to our knowledge does not constitute doing business in that state and therefore Tax Savings Inc and Property Inc are not required to qualify as a foreign corporation doing business in California or other states. It is important that when the property goes through escrow into Property Inc, the escrow be initiated by Tax Savings Inc in Nevada. This is called a double escrow, and it may save you some grief in initiating the escrow in your state. What about the note? Tax Savings Inc owes you a $50,000 note. If you elect to call the note, Tax Savings Inc pays you the $50,000 out of it's $150,000. That $50,000 is in no way taxable to you because it is not profit or gain for you. That leaves Tax Savings Inc with a $100,000 profit as retained earnings to do whatever you direct it to do. It's up to you. If you invest it right, you will probably eliminate even the federal capital gains tax. 1. You preform services valued at $100 for Tax Savings Inc. in exchange for it's stock. Transfer Tax Savings Inc stock from Tax Savings Inc to you. 2. Make the trade. Transfer property (deed) from your to Property Inc in exchange for Property Inc stock. 3. Tax Savings Inc purchases the stock of Property Inc from you for Property Inc stock. Tax Savings Inc and you exchange Property Inc stock and demand note. 4. Buyer pays Tax Savings Inc $150,000 in exchange for the stock of Property Inc. Property Inc owns the real estate. Tax Savings Inc and the buyer exchange money, notes and contracts or whatever and Property Inc stock. 5. You make a demand and call the note for $50,000. due you from Tax Savings Inc. Tax Savings Inc pays you out of its $150,000, leaving you with $50,000 and Tax Savings Inc with the remaining $100,000 profit. Tax Savings Inc gives you $50,000 for the exchange of its note. 1) Tho $100,000 profit is in Tax Free Nevada. There are no state capital gains taxes on it, nor any other applicable state taxes against it. 2) For California - when the property was transferred from you into Property Inc the re-appraisal tax base was fixed forever because the property will never be transferred again. You can guarantee the tax base to your buyer. 3) Although there is a Federal Gains Tax applicable to the $100,00 capital gain in stock, a stock capital gain is treated differently than a real estate capital gain. We suggest that, to avoid being taxed, it is much easier and more flexible to work with a capital stock gain than a real estate capital gain. 4) The escrow transferring the property from you to Property Inc should be initiated in Nevada. The Nevada escrow company will obtain a California escrow company to make the necessary recordings and filings as required in California. If I transfer my property into a corporation, isn't it true that I will lose my depreciation tax deduction as a result? (It should be pointed out that depreciation tax deduction applies only to commercial property and not to a private residence. When you get to the bottom line, the answer is no. It is true that you as an individual lose the deprecation tax deduction as such. That is because the corporation is in the eyes of the law another legal person. So you cannot use another person's deduction. However, if you transfer the property into an S-Corporation, the S-Corporation will gain the tax depreciation and that "book loss" will pass through to your individual return, In that instance, you recapture the depreciation as loss due to your S-Corporation status. Keep in mind that when you own more than one corporation at a time, you may forfeit your S-Corporation status, because your corporation might be part of an affiliated group, depending on ownership percentage. Also, be aware that in the situation of a holding corporation holding other corporations or owning at least 80% of the stock of those other corporation, the IRS would construe that as constructive ownership and you would also forfeit your S-Corporation status. So if you lose the depreciation deduction as an individual, you will make more net profit within this plan |