Deferred Payment on House Sale -- Capital Gains Tax This Year?

Question

I'm looking to sell a house that I've recently rehabbed to an LLC for roughly $250k by years end. Then, next year, I plan to have the LLC list and sell the house to the general public.

I want to sell the house to the LLC and have them pay me when they sell it (the LLC pays nothing now/this year). If I do this, can I count the personal capital gains tax on the $250k on my taxes THIS year?

There is a reason for my madness, but I just want to know if the deferred payment on the sale of a house can be condsidered an "account receivable" --or something similar -- and be applied this year.

Steve Babiak · Answer

Mark, Since you are in PA, if the property is in PA you can expect to pay the Real Estate Transfer Taxes on your proposed transaction(s), so that might impact what you expect to net. The PA Dept of Revenue will likely not consider this exempt.

Mark Beekman · Answer

Thanks, guys. I just talked to a couple of CPAs and an attorney. Apparently I would need to make the purchase through my S-Corporation since the LLC would be a disregarded entity by the IRS. I would also assume that I'd need to file taxes on an accrual basis since I wouldn't be getting paid for the sale until 2011. The reason I'm doing this is because I'm making a very lucrative investment through my newly established self-directed Solo 401k. I need to be able to contribute a specific amount of money into the 401k this year in order to avoid/defer taxes on the proceeds of the investment. The money I'll be saving far outweighs any taxes that I'll have to pay on the transaction(s).

Dave Toelkes · Answer

Mark, I am not that well versed on 401k questions. I was always under the impression that you could only contribute EARNED income to your 401k. That is, only income subject to payroll taxes and received during the year can be contributed. If so, then the proceeds of the sale of your property would need to be self-employment income to be eligible for contribution to your 401k. If your sale profit would qualify as portfolio income, then I don't believe that income would be eligible for contribution to your 401k. I also believe that the contribution to your 401k has to be earned income that you have actually received. Even though the profit from a dealer disposition is recognized in full and taxable in full in the year of sale, even if an installment sale is used, I don't know if recognizing the gain taxed as self-employment income can still be contributed to your 401k if you have not actually received it. Maybe your 401k custodian should answer the question about the source of income that can be contributed. The answer to this question may render your property transfer and delayed sale strategy pointless or give you the green light to proceed.

Account Closed · Answer

You would certainly have to choose if are going to report on a cash or accrual basis. How you setup the LLC will definitely make a difference as well. Sounds like you have set it up as a purely pass through entity. You'll want to make sure that it is setup properly if you are using it in a self-directed 401K.

Mark Beekman · Answer

Doesn't bother me too much for 2010. And don't get me started on an IRS rant. I've already had my quota for the week.

Bryan Hancock · Answer

Interesting...does accrual-based tax filing cause you any additional heartburn? Why can't taxes just be easy?!

Bill Gulley · Answer

If we have losses this year or other deals flowing in next year, it might be better to bite the bullet this year. If the sale is closed this year, you can recognize the gain. An installment deal, it's recognized as received, but you could pay it tody. Steve make a goofd point, this is just about income, but the transfer tax will be had when the interest is transferred.

Bryan Hancock · Answer

I could be wrong, but I doubt you will get any fuss from the IRS about recognizing the gain SOONER than later. How could this possibly be beneficial for you? Do you need to offset some losses you wouldn't be able to take otherwise because of passive loss limits or some such? I would love to know what your plans are because this may help with my taxes going forward.

Bill Gulley · Answer

Depends on how the contrcat is written and closed to recognize the sale. An installment sale, taxes are due as received, or you can claim the entire amount I'm sure since Uncle Sam would be getting their money today rather than waiting. This is how I did it, but things change and I'm not 100% sure, so double check, maybe someone here has done this recently or maybe Charles Perkins is lurking...LOL