Would this be legal... (1 Viewer)

crosswatt

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A family friend has a rental property that his father left to him. He wants to sell it, but will get hammered by capital gains taxes. I'd like to buy it, but I don't have the money. Would it work to:
A) Form a corporation with he and I...
B) Move the property under the corporation...
C) Take out a mortgage for an agreed upon price...
D) He becomes a silent partner in the corp., and I repay the loan from the monthly rents.
He would have access to the money, but would he be responsible for the funds as though they were a sale price? And would this circumvent the tax?
 

saintfan-n-alex

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he would have to be part of the loan, it would be on his credit report (if im not mistaken) and could hinder him in getting other loans depending on his credit limits.

if he sells can he sell at a reduced price for tax purposes or are the capital gains on the value of the house (appraised) and not the sell price.
 

JimEverett

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I don't know what the tax implications are or how they treat possible fraudulent transactions - but if I was suing your friend the transaction would raise my eye as a possible fraudulent conveyance when he moved the property to a corporation - unless the corporation paid him fair market price.
 

The Mongoose

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Not to mention you will not be able to get a homestead exemption as a corporation.

Explain more about step C. Who will be taking out the mortgage? The corporation?

I would think a better option would be for him to owner finance the property to you at a price that he won't pay capital gains on. Then form a corporation that will somehow use the rents to pay him (and not you) until he hits a price he is comfortable with, at which point all rents go to you.

Either way is shady, though. You need to consult an attorney, I think.
 

Sandman

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I'm not a tax lawyer, so I really can't give you a good answer. However, what is being attempted is avoidance of taxes. Not all "avoidances" are illegal, but you better make darn sure what you are doing is okay. The interest and penalties that your friend would have to pay (if not jail time) would be steep if it's illegal. If you really want to do this, spend a little money and get the advice of a tax lawyer.
 

xpuma20x

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A family friend has a rental property that his father left to him. He wants to sell it, but will get hammered by capital gains taxes. I'd like to buy it, but I don't have the money. Would it work to:
A) Form a corporation with he and I...
B) Move the property under the corporation...
C) Take out a mortgage for an agreed upon price...
D) He becomes a silent partner in the corp., and I repay the loan from the monthly rents.
He would have access to the money, but would he be responsible for the funds as though they were a sale price? And would this circumvent the tax?
Next Step:

E) Don't post your possible illegal concept on a forum that pretty much anyone can read :)
 

The Mongoose

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isn't their a window where you don't have to pay captial gains if you re-invest the profits?
He could do a 1031 exchange, where he has a year to buy a property of the same type.

You can only do that with investment property, though, not a residence.

If it's a residence, then you can put the proceeds into the next house with no tax implication.
 
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crosswatt

crosswatt

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Next Step:

E) Don't post your possible illegal concept on a forum that pretty much anyone can read :)
heh. Good point.

However, I have no intention of doing it if it is illegal, and would retain an attorney to explore it further. I just wanted to tap into the collective IQ of the board, to see if it was worth exploring further, or if it was a big no. And, as always, this board is on top of the situation. Thanks.
 
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crosswatt

crosswatt

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I don't know what the tax implications are or how they treat possible fraudulent transactions - but if I was suing your friend the transaction would raise my eye as a possible fraudulent conveyance when he moved the property to a corporation - unless the corporation paid him fair market price.
The loan taken out by the corp would pay him, I'm just not sure if it would still constitute capital gains or not. He can afford it, and I'm sure he doesn't want to reinvest anything. He's older and ready to retire. So, I'm trying to figure the best way to get him his money, with the least amount of tax hit possible, and me a source of sustainable income to help build something with. The original post was just my first thought, and didn't know if it was clever or crooked, or a little of both.
:mwink:
 
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crosswatt

crosswatt

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Take a look at a "rent to own" concept...

I will offer him to owner finance it, but he may want the bulk of the money now. I can't afford to do that, so I need a way to compete with someone who can. Saving the capital gains tax for him would help me do that.
 

JimEverett

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Going way back in my memory here - but if his father died and left him the property isn't your friend's basis in the property the market value at the time of the transfer? Maybe that would minimize his concern about capital gains taxes.
 
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crosswatt

crosswatt

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Going way back in my memory here - but if his father died and left him the property isn't your friend's basis in the property the market value at the time of the transfer? Maybe that would minimize his concern about capital gains taxes.
Could be. Also, his father failed to properly prepare for the inheritance tax, and it cost him some serious $$$. He could afford it, but it still had to hurt. Would that also reduce his exposure?
 

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