Question for Accountants--capital gains (sales, CPA, 2010, corporation)

[Mainer61]

A woman I know bought a B&B in 1985 for $120,000. In 1996 she added her daughter to the deed and formed an LLC. She says that her accountant told her if they sell it (appraised at $460,000) they will lose most of it to capital gains due to the depreciation (accelerated?). Does this sound right?

Also, what would happen if she sold her half to her daughter for $50K?

[golfgod]

Wow, not a very good gain for 23 years of ownership, a bit over 5%/year on a quick swag. I'm not sure what the standard depreciation on that building would be, but on a single family HOUSE it would be 27.5 years, so even with the accelerated she'd be close to the standard depreciation.

LT capital gains are 15%. I'm not sure how much "recapture" she'd have, but I dont' think she'd lose "most" of it. Did she ask the CPA to explain how he arrived at the figure of "most"?

golfgod

[Mainer61]

It makes no sense to me at all. It doesn't seem that she would have any capital gain after this amount of time

[StealthRabbit]

Accelerated depreciation on real estate!... I don't think so. Time for a new accountant (Or more facts / understanding)

The depreciation issue does not affect the dirt, so only the depreciation on the structure and improvements will adjust the cost basis.

The LLC is probably a 'pass-thru' entity to both partners (members), so theoretically they should share the gain based on their % of initial capital contribution, and have a very beneficial 15% LTCG tax (temporarily... supposedly through 2010). If there is a buyer, and a decent price, AND they want to sell - it could be very beneficial to get rid of it sooner than later. ~$60,000 tax on gain now, or likely $100,000+ in the future (based on $60,000 of recaptured depreciation, which is probably too high)

[Mainer61]

The accountant told them that due to the depreciation, if it sold for $700K the mother would pay about $300K in capital gains and the daughter $200K. Can that be after owning it for 23 years?

[chet everett]

Somebody was not paying attention.

Have they made ZERO costs / improvement in the 23 years? That would change their cost basis. Even then the TAX would be only 15% of the GAIN. I don't mind paying $45,000 in taxes if I still walk away with $245,000 in gains...

[golfgod]

Mainer61 wrote;

if it sold for $700K

In your first post you said it was "appraised" for $460K. Did you perhaps mean "assessed" (that's tax man's value)?

the mother would pay about $300K in capital gains and the daughter $200K.

LT capital gains rate is 15%. I suppose the ownership % of the LLC could change things, but... That's $500K in LT gains TAX. That would require a GAIN of $3,000,000. I'm not sure how they're going to have a gain of $3MM on a sale of $700K.

I strongly suggest having your friends go see a REAL CPA, not someone at H&R Block.

golfgod

[StealthRabbit]

well... from your numbers ($700k sales price - cost basis with $300k obligation to mom and $200k to daughter)

I can only guess...this ($500k) is the total taxable gain (sales price - cost basis), not the TAX.

so worse case would be if the property was held in an LLC that was NOT a flow through, and had instead held the property as a Corporation (unlikely, but possible), & fully depreciated (not IRS legal as per NO depreciation on the dirt + improvements should have been on a 39 yr depreciation schedule) Corp held prop would not be eligible for LTCG. - it would be very 'un-smart' to hold property as a corp, and not have the tax advantages of a private property or an LLC 'flow thru'. I can't imagine any CPA would do this, and if done ... it is time to file a stack of amended returns and get this straightened out.

most likely the tax due on a $700k sales price would be -
$700k - cost basis - improvements + previously taken deprecation. so...
$700k - $120k - ? (0 for simplicity) + 18,462 = $598,461 Taxable gain [$18,462 = 60,000 land cost depreciated SL on 39 yr schedule, for 12 yrs]

thus... mom would owe tax on 60% of $598,461 or $359,077 * 15% = $53,861 TAX DUE from Mom

and 40% of $598,461 or $239384 * 15% = $35,908 TAX DUE from Daughter

This calculation is still pretty generous toward IRS (no improvements or sales costs deducted)
and would be an estimate for "worse case, but still eligible for Long-term capital gain"

I suspect a good acct would get those obligations down 10-20% (20% discount if the gain is $500k, as per your reply)

I'm certainly no accountant, but this stuff is intriguing.
Don't get hammered by the accountants, paying the tax is bad enough !!

[Mainer61]

I totally agree with you guys...thanks. The appraised price is $460K but they think they can sell it for $700K, which is ridiculous. They have a 'real' accountant (I think), but I've been telling them to go to someone else. Thanks for your backup..

[killer2021]

Originally Posted by Mainer61

I totally agree with you guys...thanks. The appraised price is $460K but they think they can sell it for $700K, which is ridiculous. They have a 'real' accountant (I think), but I've been telling them to go to someone else. Thanks for your backup..

lol yea they are arrogant on the price. In this market it will only sell for 400k at the most.