A:  Consider making the improvements and repairs while the property is still a rental, the repairs will be deductible expenses. To play it safe, consider renting out the property for a time after the renovations to ensure that the property was indeed a rental during the time the repairs were made.

Thereafter, move into the property and treat it as your principal residence - use the address for bank and credit card statements, voter and vehicle registration, driver's license, bank checks, voting address. You must live in the property for at least 24 months during the 5-year period prior to sale. Remember, you'll have depreciation recapture taxed at 25% for the amount of depreciation claimed or allowable after May, 1997.

Q:  What happens when a C Corporation is sold to an existing public company? There will be no cash paid; stock in the acquiring company will be given in exchange for all stock in the C Corp.

A:  If the transaction is structured as a tax-free reorganization, there will be no tax consequences to the selling shareholders who receive stock as long as they continue to hold the stock in the acquiring corporation. Receipt of cash generates capital gains or losses. Of course, once the stock is sold, the shareholders will recognize either capital gains or losses.

Q:  I would like to establish a business entity to buy and sell properties. Also, I recently purchased real estate that I hope to sell without incurring taxes. Is this possible?

A:  Yes. Consider an LLC as the entity since there is not an entity level tax. Use the tax-free exchange provision of IRC Sec. 1031 to avoid paying taxes. The tax-free exchange provisions apply when you transfer like-kind property held for investment for replacement property also held as an investment. Any cash received or relief of indebtedness on the transferred property fall outside IRC Sec. 1031 and you'll have a taxable transaction as to those amounts. Also, if you sell property and purchase a replacement property, IRC Sec. 1031 will not apply - so be careful.

Q:  I bought a condominium unit as my residence 24 months ago when I held a student visa. I put title in the name of my friend because I could not qualify for a loan. Now, I would like to sell my unit, but I heard the gain will be taxed at 36% since the property is considered investment property. Is this true?

A:  Probably. You must own and live in the residence for at least 24 months before the residency exclusion applies. There could be exceptions if you had to move due to unforeseeable circumstances - see my articles on residency on this topic. You could be considered a non-resident alien if you are here on a student visa in which case, the foreign withholding rules (10% of the gross) applies. Note: Federal long-term capital gains are taxed at 15% so I'm not sure where you get the 36% figure.

Q:  A U.S. taxpayer(80%) and Mexican resident and citizen (20%) want to purchase a property together in California. The property will be the residence of the U.S. taxpayer. What are the tax consequences if the property is sold in 2 years or the Mexican owner dies?

A:  In general, the non-resident alien is subject to California and Federal withholding taxes of approximately 13.3% on the "gross" sales price relative to his 20% interest. If he dies, the NRA's estate is subject to probate in California. In addition, if the size of the U.S. estate exceeds $60,000 there could be federal estate taxes owing. The residency exclusion rules should apply to the U.S. owner as to his 80% share of the property, provided he owns and lives in the property as his principal residence for at least 24 of the 50-month period prior to sale.

The browsable version of this page: January, 2004 FAQ

All contents copyright © 1995-2004 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.