Free Research Paper On 3rd Street
M.B.C Tax Consultants
1234 – 0090
REF: TAX LIABILITY IN SALE OF BUILDING AND PURCHASE OF CO-OP UNIT SHARES
With the intentions of making a sale that will amount to the offer by the client for $850,000, it will be very implicit that the client will be liable for income tax on the gains made from the sale of the assets. The data that you have provided, records that the property/ building was bought at the price of $500,000, subject to the accounting, provision in the IRS (2015) that accommodate and regulate that assets need be depreciated on an annual basis. The cumulative depreciation for the building settles at $120,000. In essence, this will mean that the building was on an assumed straight-line depreciation at the rate of $12,000 per year.
Therefore, in simple computation, this text identifies that the net book value for the building at the end of the ten-year period settles on $ 380,000. This computed as follows
Therefore, it will be true to assume that with the intentions of selling the building at $850,000, you will have made a profit of [850,000 – 380,000] = $470,000.
In accordance with the laws on income tax (Milligan 1), any property sale profits are liable to tax; similarly, comparing the case of the department of revenues and Tri-Financial Group, the court’s ruling on successor liability Tri-Financial Corp. v. Dept of Revenue, 495 P.2d 690 (1972), the defendant was found in liability of asset sale tax that the company had intended to pass to the buyer of the property. Therefore, as per the regulation of the IRS (Internal Revenues Authority), the successor liability is protective of the immediate purchaser duty to pay tax. Nevertheless, the tax liability in this place can only be avoided if you the client can prove that the building had initially been passed to you on the grounds of unpaid tax liability from the original owner.
Nevertheless, provoking the directions of the IRS 1 (1) in locating the sale of a business or property, one can be subjected to extremely large tax liabilities negating the sale proceeds to almost less than what the initial purchase for the assets was. As much as there is the acknowledgement in the control of the payment to the IRS, this tax is inevitable and it will be paid in full amounts eventually. Therefore, the profits amounting to $ 470,000 will be liable to tax on the property gains. Therefore, the best option that you will have is to place negotiations with the buyer, such that these negotiations will be influenced of considerations to have the selling price inclusive of tax shield. By this, it will be to ensure that, the $850,000 is inclusive of the value of the property and the tax liability without any losses to you the seller.
On the other hand, it might be very prompt to consider that capital gains on transferred assets are liable to the ordinary income tax as per IRS (2015) and will, therefore, avoid the 15% maximum long-term capital. Equally, the sale proceeds can be accumulated on instalments basis making you stall on the tax liability and eventually paying it off later when it is less intrinsic as the value of the tax liability will not be changing with respect to any future changes.
Considering the second case, the taxable amount at issue is your profit of exchange. This will still be considered as the profit: the difference between your tax basis and your proceeds from the exchange of asset and co-op shares. Your tax basis will therefore, be your original cost of the asset, less any depreciation deductions. Your proceeds from the sale generally means the total sales price, plus any additional liabilities the buyer takes over from you, making this consideration that as much as you will want to escape liability for income tax there is still an aspect of property gains that is liable for tax (Milligan 1).
The client has an option of making a trade exchange with the investor under IRS sec.1031. In this consideration, you want the investor to buy the shares that were converted in 2012. In particular, this will mean that the investor will pay a cumulative sum of [425,000 * 2] = 850,000, which is an equivalent of the price that the investor is willing to pay for the building. In particular, this presents as the very amicable method of evading the income tax liability in the first scenario of you the client receiving money proceeds from the sale of the building. In essence, this means that the building will be valued before exchanges to make the transaction fair and equal in value.
In a look at the IRS sec.1031, it will be true that the provision will be cognisant of the fact that liability on capital gain will still be on you as the client upon the first records by the new owner of the property who will now value and report the value of the building at 850,000. In essence, at the end of the financial year, it will be true to assume you, the client will be liable to tax evasion similar to the case of Gregory v. Helvergin. In this presentation it was the description of the ruling judge in the supreme courts declared that in any arrangement that a person will arrange his affairs such that he is not bound to income tax in a certain pattern, the person is liable for income tax evasion. In particular, the court will be very declarative in asserting that you will be liable for prosecution in the description of a number of fines that are inclusive of tax evasion under concealments of assets. This will be declarative to a number of punishments as per the IRS. Equally, you (as the client) will also be open to litigation under the concerns of fraud in inconsistent and unexplainable behaviour.
Therefore, it will be the description of this letter to highly declare that the second scenario can only be accepted if you (the client) is willing to disclose that there exists a transfer of property to the IRS for capital gains. Nevertheless, it will be important to acknowledge that income taxes primarily focus sale of property, capital gains, and exchange of property of lease of property, and equally trading activities within the law of the states protected by the IRS.
With all these considerations and the deliberations of the consequences that will amount in the liability case, it will be evident that the available options for you as the client will be to incur the income tax liability or equally negotiate for a better price with the buyer. In particular, this presents as a position of the better option in incurring the income tax later; therefore exploiting the options under deferred tax liability under the IRS statutes on capital gains.
IRS 1. "Ten Important Facts About Capital Gains and Losses," 2015. From <http://www.irs.gov/uac/Ten-Important-Facts-About-Capital-Gains-and-Losses>.
IRS. "Capital Gains, Losses and Sales of Homes," 2015. From <http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses-and-Sale-of-Home>
Milligan, Brian. "Tax avoidance: What are the rules?" 2014. From http://www.bbc.com/news/business-27372841.