Which Is Better

I have a S corp and had a property in the companies name when I sold it. I had it for 4 years as a Lease Option house (rental). I sold it in Sept 07 for (lets use easy numbers) 135K I bought it for 85K with a 25K balloon note due so total purchase price was 110K. When I sold the property I gave credits for taxes (2K) and (4K) in closing costs. I have a net profit on the HUD for 29K not including the 2k for taxes or the 25K due to previous seller (promissory note).

I have over 3200 in receipts for cleaning, repairs, water heater, electric etc that was done to the house in 2007.

I want to know what will I have to pay taxes on (in your opinions as I understand to not take any advise here as final, talk to an accountant)...

Thank you

Seems like tax could be 0 if you did a 1031.

This is a hard question due to recaption of depreciation, but it seems that the tax would be roughly 15% of the 29000-3200 (I bet there are more receipts around)

When did you purchase the property? When you purchased, did you put the tenant boyer in place with a four year option?

I purchased it in Aug of 04 and put a tenant in it Jan of 05 with a 2.5 year lease option. There was a tenant in it when I bought it and after I raised their rent they moved that was why Jan 05 was the tenant I put in with the L/O

So, essentially the property has been "for sale" under a lease option since you acquired it. It would appear that your intent was to sell the property for a profit rather than hold indefinitely for the production of income. You used a lease option technique to facilitate the sale. Your scenario meets the definition of a dealer disposition.

Your profits are ordinary income and self-employment income taxes apply if you did not take a reasonable salary from the S-Corp. Add in state income taxes if they apply in your location and your combined state and federal tax rate will be in the 50% neighborhood.

Just how I see it.

Your numbers don't quite add up for me. You say you sold for $135K, you bought for $110K. The difference is $25K. You gave seller concessions of $6K and you have repair/cleaning costs of $3200. It seems that your numbers give you a profit of $15800, not $29K. If you use 50% as your maximum tax hit, then it would appear that the estimated tax liability on the sale profit will be around $7900.



[ Edited by NewKidInTown3 on Date 01/05/2008 ]

"What does the "for sale" all that time have to do with anything?"

Property purchased with the intent to sell ("flips") are a dealer disposition, subject to "self emplyment" taxes and regular income tax rates. Properties purchased as an investment (rentals) which are held for over a year, after which a business decision is made that selling the property would be beneficial, are investments subject to the long term capital gains rate.

However in your case the profit is small enough that it isn't going to have a huge economic impact in any case. But when a larger profit is realized, initial decisions on how to handle the property can have a huge impact on how much remains in your wallet in the end.

Chris

Thank you Chris, I did not know that and will intend on keeping property as rentals/long term investments from now on.

Very good information.

Thank you again.

S Corps don't pay self-employment taxes. You would withhold 7.65 percent from your salary and match that as the employer portion (and are able to write off half), which equals the same 15.3 percent you would have paid in SE tax; however, you are only paying it on the salary portion. Knowing that the IRS is not super aggressive about social security taxes, and also knowing that S Corps (under a million dollars in profits) have extremely low audit rates (especially if you take most of your deductions away from the normal audit-triggering 1120 S form (on Line 19--a separate written schedule of "other deductions"), I take a very modest salary, have a lot of write-offs--including employee's business use of personal vehicle (who needs mileage deductions when you get depreciation?), and collect the rest SE-tax free as a distribution. Dividends are not subject to SE tax. Yes, the IRS COULD say my salary is too low, but that's only if I get audited, which is slim, and I have many deductions to substantiate a lower salary, so I can put up a good case if challenged. Bottom line: In aggressive tax avoidance, it's better to beg forgiveness than to ask permission. If you work the legitimate deductions on an S Corp the right way (on Line 19) and pay yourself around $1,000 a month taking the rest as distributions, you're probably okay. Worst case, you will have to pay the back SE tax on a recalculated salary IF you get audited and IF you give in (you can fight rather effectively with the use of Affidavits and squash the IRS if you know the system). I know several people who pay themselves no salary at all for a few years in the beginning and have not been audited. The IRS simply isn't in the SE tax business. But if you have employees other than yourself (and spouse) and don't collect payroll taxes, the IRS will definitely go after you. They have closed businesses over the payroll tax issue. Just some info that I thought I'd share. [addsig]