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Should we buy property under a corporation?

January 19, 2005


Subject:  tax question
From:  Jeremy
Date:  Wed, 15 Dec 2004

My father and I are thinking of buying a property that is built on two parcels. We are thinking of splitting the two parcels, and building houses on two of them and selling them individually. This would be our first time attempting something like this, and we would like to know if we can avoid paying capital gains taxes by buying the properties under his corporation.

We plan on being finished with the improvements in 3 or 4 months, and would not be able to buy and sell them as individuals without staying in them for more than two years, each.

Thank you,
Jeremy

Answer

Date:  20 Dec 2004

Hello Jeremy,

Corporations don't enjoy a lower federal income tax rate (15%) on long-term capital gains as most individuals do. Unless the corporation is an S corporation that passes through its income to its shareholders, a double tax can apply, at the corporate level when the sale is made and at the individual level when the corporation pays dividends or is liquidated. That's the reason most tax advisors don't like their clients holding real estate in corporations.

If you want to entirely avoid income tax on up to $250,000 of gain each, your best bet is to use the homes as your principal residences for more than two years.

If you simply buy the properties for development and resell them when the houses are done, the income is probably ordinary income, and you won't even be eligible for a tax-deferred exchange.

Since you are getting involved in an area you aren't familiar with, I highly recommend that you work with advisors to help you avoid making costly tax and legal errors.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Should we buy property under a corporation?

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