property_transaction_notes - 1 TAX 6845 Tax Planning &...

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Unformatted text preview: 1 TAX 6845 Tax Planning & Consulting (October 6) Topic: Operating a business: Property transactions updated: September 29, 2009 I. Some of the major tax related factors influencing property decisions include: A. Ordinary tax rates: The relative tax rates between taxpayer/owners (including family members, corporations and other entities) often indicate who will benefit most from deductions and who will have to pay higher taxes on income. B. Capital gains: Tax planning relative to property transactions for individual taxpayers involves an effort to insure favorable capital gains treatment when the property is sold. Corporate capital gains, however, are taxed at the same rate as other income. Moreover, the fact that it is difficult to remove assets from corporations without recognizing gain and the fact that creditors have access to corporate assets means that it is often desirable to keep major fixed assets out of closely-held corporations. C. Alternative minimum tax: The AMT provisions require investors choosing tax- favored investments to add back many of the items that reduce taxable income in the computation of alternative minimum taxable income. For example, in some instances less depreciation is allowed when computing the taxpayers AMT. (AMT will be covered in weeks 10 &11.) D. Loss limiters: The at-risk limitations, the passive loss limits, and the investment interest expense limitations can all be factors affecting the tax consequences associated with investments in property. While they influence all taxpayers especially individuals the rules are less of an issue for corporations. E. Depreciation: The nature of real estate investments (as well as real property used in a business) is that the owner receives a depreciation deduction on an asset that may often be appreciating in value. Of course, interest and other expenses offset revenues, hence, the asset may show a tax loss at a time when it is actually producing economic income. F. Trapping: The question of whether to transfer property to a corporation is often influenced by a fear of having the appreciation trapped in the corporation. It is difficult to remove appreciated property from a corporation without tax consequences. (See section II choice of entity). G. Lock-in: Owners of appreciated property often feel locked into the property because the sale will produce a large gain (tax). Like-kind exchanges and other nonrecognition rules may be beneficial. The step-up in basis rules associated with inherited property under the current estate law can assist with basis increases, but the step up in basis provision is scheduled to expire in 2010 (when the estate tax is repealed). 2 H. Liabilities: The possibility of unexpected liabilities often influences who holds title to property. Frequently, real estate and other major assets (and any associated liability) are held in separate legal entities. Often a partnership is formed to hold such assets. The assets are in turn leased to the corporation. The assets are in turn leased to the corporation....
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This note was uploaded on 03/04/2010 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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property_transaction_notes - 1 TAX 6845 Tax Planning &...

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