property_transaction_notes - 1 TAX 6845 Tax Planning...

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1 TAX 6845 – Tax Planning & Consulting (October 5) Topic: Property transactions updated: September 16, 2010 I. Some of the major tax issues affecting property decisions include: A. Marginal 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 taxpayer’s AMT. (AMT will be covered Oct. 26 & Nov. 2). D. Loss limiters: The at-risk limitations, the passive activity loss rules, 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 limiters are less of an issue for corporations. E. Depreciation: The nature of real estate investments (as well as real property used in a trade or business) is that the owner receives a depreciation deduction on an asset that may often be appreciating in value. Of course, interest, property taxes 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 inside the corporation. While is relatively easy to transfer property into a corporation without tax consequences (Sec. 351); it is difficult to remove appreciated property from a corporation without tax consequences. Note: Section II – Trapping & choice of entity looks at the tax consequences of both liquidating and nonliquidating distributions across C corporations, S corporations, and partnerships (including multiple member LLCs).
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2 G. Lock-in: Owners of appreciated property often feel locked into the property because the sale will produce a large gain (and corresponding tax liability). Like- kind exchanges and other nonrecognition rules may benefit the taxpayer. 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 (with some limited
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property_transaction_notes - 1 TAX 6845 Tax Planning...

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