Can a CPA or Forensic Accountant 'splain this...?
 

A neighboring building owner recently sold his building to his own corporation for $500k. Only problem is, these buildings are worth about $95k on a good day. My building is identical to his building and I know what it's worth. I'd do back-flips if I could get what I paid for it ($148k) about two years ago.

What kind of financial wizardry is he practicing? Money laundering? Tax sheltering? :confused:

Even with capital gains tax, he'll profit personally. Until the business sells the building or closes its doors there is no loss, and then the loss is figured into the cost of doing business or against taxes or credit owed. I could be wrong.

Exactly. He's got to pay capital gains AND 5x the property tax (commercial property tax here is based on the latest sales price).

I don't get it.

Can you say that slower...in English? The individual has to pay capital gains on the sale. He paid something like $40k for the property about 15 years ago.

So he pays 5% on the $460,000 profit = $23,000. He still profits $437,000 minus any other tax or fees. If he sold the building to you he profits $50,000.

So you're saying he writes off the $437k as a cost of doing business? Would the IRS allow this? Everyone could say their building is worth $2mil and get a $1.8mil tax credit...? I think the IRS would want to see some kind of appraisal, no?

My guess is that his corporate accountant can reasonably show that the purchase is valid and the corporation has other losses and gains with which the building purchase offset. The building becomes an asset of the corporation and that's the end of it from his "personal" perspective.

Capital gain tax is cheaper than ordinary income.

So he's taking his profit as a gain instead of income.

His property tax will jump from under $1k/yr. to $9167/yr. (according to our property assessor's tax calculator). Now the part that pisses me off is MY property tax will go up next year when the appraiser sees that "nearby" sale.

Where does the "profit" come from? He sold the building to himself, basically. Did he really write a $500k check for it?

Don't blur what his personal gains are with his corporate loss/gains. Heck he could close his corporation next year and only have paid a small portion of that higher property tax.

Turn him in to the assessor... That has to be some kinda fraud...

Are you kidding? The Property Assessor gets to collect $8k MORE in annual property tax. Do you think they care? If he sold the property for less than what it was really worth (to avoid paying property tax), they would probably jack him up.

And, this is a free country. I can sell you a piece of petrified dog doo for $1mil. and there's nothing illegal about it.

The corporation does what it wants to do. If his corporation want's to buy an over priced property and has the cash to do it with, that's the corporation's problem. Ex: If McDonalds wants a building for its location, and it's over priced by the seller, it can buy it or it can walk.

There is no fraud here. Maybe less than ideal from an ethical perspective, but stuff like this happens all the time on different orders of magnitude.

If his corporation was going to profit $1mil this year, it now will only profit $500K. Everyone is happy, and there is an over-valued asset owned by the corporation. The corp. pay's less tax on profits. The individual pays capital gains and maybe the owner takes home less from the corporation, and pays less in personal income tax as dad911 stated. 5% gains tax versus 35% personal tax....

OK, so I'm sorta understanding this, but...what prevents EVERY corporation from doing this? Heck, I'll sell my building to my Corp. for $1mil before the end of next Qtr. That should put me in the red for about five or six years. I'm going to get back LOADS on my subsequent tax refunds, no?

We'll you'll have to borrow the money from a bank to keep your corporation afloat, and they'll want to review your books. If you are making bad coporate decisions (or you're always in the red), no money for you!

So until you build up a coporation (and you don't have a board and shareholders to answer to) that has plenty of cash you can't play this game. And good accountants would probably warn you to be REASONABLE on what you pass through your coporation.

What do I know...I'm not even in the finanacial numbers profession....but I've seen enough that I think I should have gone into finanace instead of engineering.

As unreasonable as the IRS is, I can't imagine they would find someone purchasing a $95k building for $500k as "reasonable".

But...I am reminded of visits to my CPA's office. My eyes glaze over as he blathers on. I leave with less $$$ in my wallet and a headache.

Why does the IRS care if his corporation is making a bad purchase? If he had bought the property from someone else for $500K because the corporation projected a 5 yr ROI why should the IRS care? If the company went belly-up because it blew $400K what does the IRS care? So long as everything is reported.... If GM loses $100 Billion in one year because it made bad decisions what does the IRS care? It didn't go in there over the last decade and say STOP - You are losing money and we cannot allow you to do this.

Making a bad business decision (e.g. - buying too many widgets) is one thing, but purchasing your own building for an obviously over-inflated price (to me) borders on tax fraud.

Well, there is legal tax fraud...and illegal tax fraud. That's why number$ guys make such a good living and we bust our arses to pay our share of taxes.

True, true...I gotta get me some "loopholes"!

Send me some when you find them for the average arse-buster who doesn't own a cash rich corporation :D

No laws have been broken or blurred. The taxes will be paid so no tax laws are broken.
He is selling the building to his corp. Simply moving business profits.
He will, as said, pay capital gains on the property but avoid paying taxes on the profit needed to buy the building. It will be amortized over probably seven to ten years. The corp will take the depreciation deduction.

Not much differnt than leasing your building from yourself if you have a business.

Very smart business and personal move.

In my simple mind, I used to be incorporated and was a sole practictioner. I buy a laptop for $500 and sell it to my corporation for $2,000, I now have for tax purposes a $1,500 additional expense that I can write off against income? Nothing in the IRS code says you have to be a frugal buyer for your corporation. Now if I bought it for $500 and sold to the corporation for $2 Million, that would be another story. At least that's how I see it.

I can't see how this avoids any tax at all. If his corporation has made a $500,000 profit
this financial year then they will still pay tax at the corporate rate on that, regardless of
any capital expenditure.

They ought to be able to depreciate the buildings over time but that does not solve any
near term tax liability.

Intentionally overpaying for an asset and then writing down the value of that asset would
have to be fraud, especially in a non-arms length transaction.

Here in Australia (I think, IANAL) a capital loss can only offset a capital gain, they can't
be applied against normal operating income, at least on a personal level.

andy

Not a tax guy but here is my guess.

He receives $500K from the company on which he pays the lower capital gains tax rate instead of the higher income tax rate due if he simply paid himself $500K salary. The company's income tax is slightly decreased due to depreciating the $500K building. So basically he extracts $500K from the company with favorable tax treatment. Later the company can sell the building for $100K and the $400K loss hits the income statement, offsetting operating income and thus reducing the company's income tax. For a company, I think gains and losses on selling property are netted against operating income, there is not the distinction between "ordinary income" and "capital gains" that individuals have. It is not kosher since the transaction has no business purpose, but he figures he'll get away with it. That's my guess.

It is only illegal if you get caught. Off setting taxes is a normal part of business. Doing "obvious" stuff like this is not. Since this is huge and very different than "normal" for the busines, I expect it will trigger an audit.