Discussion:Tax on holding company
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Discussion Forum Index --> Tax Questions --> Tax on holding company
| 3 October 2007 | |
| My client, a holding company, has a property that he bought in 2002 for 2.75M and is planning to sell it for 4.75M. This is my first time doing this kind of thing and I have questions. My questions are:
1. is the holding company subject to the capital gains tax or ordinary income tax as a result of the sale? 2. in case the holding company will be subject to capital gains tax, what are those items or expenses that can be part and parcel of the investment cost. are the property taxes and property insurance classifiable as investment cost? | |
| 4 October 2007 | |
| Klomillo, what do you mean by a "holding company"? That term usually refers to a corporation that does nothing but hold the stock of subsidiary corporations, collect dividends and distribute them to its stockholders. Ordinarily a pure holding company wouldn't own real estate.
Whether the sale of this property generates capital or Sec. 1231 gain or ordinary income depends on what kind of asset it is in the corporation's hands. That depends on how the property was used and the purposes for which it was held. With more information we might be able to give you some suggestions. | |
| 7 October 2007 | |
| katie, thanks for the reply. actually, it is a corporation which owns this real property for investment purposes. | |
| 8 October 2007 | |
| So it isn't a holding company in the usual sense. Is this undeveloped real estate? If not, is it rented? | |
| 8 October 2007 | |
| And, what kind of corp is it, a C or an S corp? And if the answer is C, who made that decision, and why? | |
| 8 October 2007 | |
| it is a developed real estate and it is not rented. it is a c corp. | |
Corptaxhelp (talk|edits) said: | October 8, 2007 |
| Klomillo, is the real estate the only major asset of the corporation? | |
| 8 October 2007 | |
| Klomillo, you're going to have to tell us a lot more about this corporation before we can begin to answer your question. For instance, if this is developed property, who developed it -- the C corporation, or someone else? What has the corporation done with the property since 2002? Used it? Maintained it? Improved it? Let it deteriorate? Held it out for sale? Does the corporation own other properties, and if so, what does it do with them?
However, for a C corporation the difference between capital gain and ordinary income is less significant than for an individual (or an S corp), because there is (at this time) no differential corporate income tax rate for capital gains. However, a C corporation's capital losses are deductible only to the extent of capital gains, so if there are capital losses (current or carried forward from prior years) to be offset, capital gain treatment can be beneficial. Otherwise it really doesn't matter much. The big deal with real estate (or other appreciated assets) in a C corporation is that the gain on the sale of those assets will be taxed twice -- once at the corporate level, and again at the stockholder level when the proceeds are distributed in the form of a dividend. If the proceeds are invested back into the corporation's business, the double taxation may not be an issue, or not be an issue for a long time. But if the property is sold and the proceeds distributed to the stockholders, in liquidation or otherwise, it will be an issue. | |
Ericstorey2001 (talk|edits) said: | 28 October 2007 |
| Try this--depending on the situation, it might be a better idea to sell the whole corporation (in other words, all the shares) instead of selling the property. There would need to be no new conveyancing work, retitling, doc stamps and fees, etc. on the actual property, thus saving a lot of legal costs. Furthermore, if the individual owned all the shares, he will be getting the cash as capital gains on the corporation shares and pay only once at 15%, a lot better situation than a double taxation scenario. If he wants to reinvest the money in the future, simple--take a few hundred bucks and form another corporation. Of course, this whole scheme will only work if the investor is the sole (or nearly sole) owner of the corporation AND if the sole (or nearly sole) asset of the corporation is the said property. Anyway, it's worth a look. | |
Corptaxhelp (talk|edits) said: | October 29, 2007 |
| Eric is right with one note... If the property carries debt, there may be some requirements from the lender when a majority of the corporate ownership changes. There may also be recourse loans on the property that will require a refinance.
Selling the stock can work our very well for both the buyer and seller but, please, make sure your client is well-represented in the transaction. | |
