Discussion:Tax Planning Ideas Re: Sale of Raw Land
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| 22 June 2007 | |
| Hi there,
I was wondering if I could get some ideas/comments from the professionals here before I meet with a tax accountant next week regarding the sale of some raw land that is in the works. I have been reading lots of info and have learned a lot here and just want to make sure I go into the meeting with some knowledge of what the tax consequences could be. Background: Land bought in 01/07 for $950,000 in an LLC with 4 partners (2 married couples that are related). We got a great deal and initial plan was to hold for a couple of years for appreciation. Then we decided to research getting the utilities there and subdividing it to add more value and eventually sell some of the lots and look into building a shopping center on the remaining lot (already zoned commercial). We also erected a for sale sign a couple of months after the purchase to see if there was any interest…this was our only “marketing” effort. We have incurred about $50,000 in carrying costs, due diligence and engineering fees so far (actually projected out to September). We have a couple of site plans from the engineer but have not submitted anything to the city for approval. We did clear the land….that was the only “physical” activity that occurred. We now have two people interested in buying it at $3.2M. The strongest candidate is doing a 1031 exchange and needs to close by November. He says he is going to submit a contract next Tuesday. Not sure what the other guys timeframe or level of interest is at this point…he just surfaced yesterday. I am sure that you have figured out my question….any way to minimize the taxes if we sell by November? I looked into 1031 exchanges...seems risky (impossible??) based on short holding period and “for sale” sign erected almost immediately. I have found that there is no “official” holding period but that the “intent” seems to drive the eligibility to participate in a 1031 exchange. The fact that the purchase and sell will be on the same tax return makes it blatantly obvious that the property was held less than a year, with such big numbers seems like this would be asking for an audit…. If we sell it I don’t mind paying the taxes that are rightfully due, I just want to make sure that any way to reduce them is explored…anyone have any additional ideas that I should research prior to meeting with the accountant? Thanks for any information, I really appreciate it!!! | |
| June 22, 2007 | |
| Maybe. I'd find a good tax attorney who is experienced in working with developers and 1031's and paying the freight for his/her direction. This is a complex area, there might be some wiggle room for a 1031, clearly no help with cap gains on a less than one year deal, no matter what. And with the kind of money involved, a 1031 is highly recommended. Hmmm. A guy just showed up here with 1031 in his handle, sherman1031 I think it was, yesterday. I'd send him a message and get his thoughts. | |
| 22 June 2007 | |
| Considering a 20% differential between LTCG and STCG rates, if you don't do the exchange you should seriously consider postponing the sale until 2/08 to obtain the 15% tax rate. The tax savings is about $450k. Even splitting the tax savings with the buyer you would be up substantially. | |
| June 22, 2007 | |
| But his other guy's doing a 1031 with a Nov deadline. So you take what you can on this, and when you can, and weep a bit. | |
Death&Taxes (talk|edits) said: | 22 June 2007 |
| Ain't gonna help much, except for Time Value of money, but an installment sale that might push the bulk into 2008 allows you to structure your tax payments from April 2008-January 2009, and by using safe harbors, might make some money on your money. | |
| June 22, 2007 | |
| Ah, now that's clever thinking...but it would kill a 1031 on his part, then... | |
| 22 June 2007 | |
| what about our intentionally defective failed 1031 leaping across tax years like a doe running from the tax hunter in camoflage? | |
| 22 June 2007 | |
| Thank you all for your replies. Does anyone know of a good tax attorney in the Maryland/West Virginia area that I could contact? I will definately look up Sherman1031 and see what he has to say.
D&T: Can our potential 1031 buyer use an installment sale or are you talking about an installment sale to a "non-1031" (is that a technical term?) buyer? I am off to research "installment note/1031" once the kids are down for naps!!! | |
| 22 June 2007 | |
| oops...missed those last two posts before replying....happens with a 2 and 3 year old running around...
JR1 I think you are saying that installmetn sale will not work w/1031s??? Kevin....sounds interesting although feeling like a doe running from the tax hunter probably is not something that I would enjoy for the next 5 years (or whatever the statute of limitaions are). | |
| June 22, 2007 | |
| Depends on whether you're the doe or the hunter, believe me! It has me excited, so that tells you something. . .An installment sale and 1031 can't go together because you don't have the cash to go into the trust for the exchange on the buy side. If the 1031 becomes defective, Kevin, why do you believe it leaps years? I thought it then kicked back to the orig. date of sale and got reported then? | |
Death&Taxes (talk|edits) said: | 22 June 2007 |
| Gee, guys, I didn't read the original question closely enough to see that the buyer wants to do a 1031. | |
| 22 June 2007 | |
| JR1, I am not saying I agree yet, but there were some interesting concepts in Discussion:Failed 1031, installment sale (1031 Across Two Years), but this still doesn't change short term into long term | |
| 22 June 2007 | |
| I sure wouldn't lose the sale over the amount of taxes due.
Best bet is to get yourself into a 1031 if at all possible. How about 277 acres in the Charlotte area of NC? Ready for some rural homesite development. Or 300 acres in NC Mountains near Blowing Rock? | |
Sherman1031 (talk|edits) said: | 25 June 2007 |
| The short holding period before sale doesn't strike me as something that would necessarily invalidate the property from qualifying for a 1031 exchange. As you stated, it isn't always about the time held as much as intent to hold. But, in this case, isn't it really that the intent was resale and the LLC members just figured it might take two years to sell?
How much documentation can you provide that supports the initial intent - to hold for two years? "Clearing the land”, immediately taking the property through the entitlement and utility process and putting a "for sale" sign on it - almost immediately...these all sound pretty close to a “development activities”. They also move the line farther away from being classified as real estate being purchased for investment. That would make it unqualified for a 1031 exchange or for long-term capital gains. However, I've heard of people in similar situations pursue a 1031 exchange. Perhaps, if audited, they will get challenged. But they feel comfortable enough that they can document their original intent - to hold for investment purpose. The fact that they did some paper improvements to the site, probably doesn't negate the initial investment purpose. They were fully intending to entitle and hold. They simply received "an offer to good to refuse". Their thinking, I am sure, is that the downside is they pay the tax and perhaps some interest. Given the amount of "grey", I guessing the chances are good they wouldn't get penalized for such a stance. As others have said, this is an area for your tax attorney and tax professional. They are the ones that will sign off on your return as being accurate and defend you in an audit so ultimately they (and of course, you) should be comfortable with your position. To reference the other discussion going on - the installment sale is usually incompatible with a desire to do a Section 1031 Exchange of real estate. There are, however, ways to salvage Section 1031 Exchange treatment. I could list some options for you if this is something being considered. | |
