Re: need a solution rehab tax problem - Posted by JPiper
Posted by JPiper on March 01, 1999 at 18:44:34:
I’ll look forward to an answer to this one along with you. However I can’t resist giving an opinion…keep in mind I’m not a tax expert.
In my view, the bad news is that since you receive your money from the corporation, that it will be taxed as ordinary income…and therefore not only subject to ordinary income rates, but also subject to self-employment taxes.
If the money were left in the corporation, then it would be subject to corporate taxes, which could be lower than individual taxes, depending on the rest of the corporation’s income. Also, as long as it’s in the corporation it would not be subject to self-employment taxes.
However you don’t own a part of the corporation. One possible solution to this might be to form your own corporation, have your partner’s corporation quit claim an interest in the property comensurate with your % interest, and at the same time execute a note back to corporation for the cash that the corporation has already spent on the property…due upon sale of the property.
Now your proceeds of the sale would come to your corporation. If you pay it out to yourself, you still experience the same consequences as above. But if you hold the money in the corporation it would be subject to a lower tax, and you may have write-offs to use to offset against the income at the corporate level.
In no case are the proceeds of the sale going to be treated on a long term capital gain basis unless your holding period is longer than 12 months.
The other factor to consider is whether the cost of incorporation will exceed the possible tax savings. That’s going to depend on who incorporates you, and your state filing fees.