| My father, who is 72, is ready to sell his rental properties: mini-storages/apartments (this is his career). He's put his whole life into the business and is looking for a sensible exit strategy. He is a sole proprietor and is afraid of the massive capital gains taxes. We have a family Accountant but would like some ideas of how to structure the sales before going to speak with him. Any suggestions? ======>When you make money on a rental property, the IRS will take their cut of your profits through capital gains taxes and through taxing your recaptured depreciation. Residential RENTAL real estate can be ?depreciated? over 27 ? years or 40 years( FOR COMMERCiaL IT IS 39 YEARS), depending on the schedule you adopt. Depreciation is an income tax deduction that enables rental property owners to recover their costs. If you don?t claim depreciation, you still have to ?recapture? it when you sell the property. Depreciation recapture taxed at regular rate involves adding the prior depreciation deduction amounts to the sale price.
If you're not looking to take cash out of your rental property, you can simply roll one investment into another in a 1031 exchange to avoid paying capital gains tax. The IRS allows you to sell one investment and reinvest the proceeds without taxation. The swap must be a "like-kind" exchange, but the IRS is relatively lenient about this with regard to real estate. You don't have to exchange your 3-bedroom rental property for another 3-bedroom rental property. You can sell your rental home and buy undeveloped farmland or even a commercial strip mall if you like, as long as the asset on both ends of the exchange is real property and both are located in the United States. This rule only applies to investment properties. You can't do a 1031 exchange for the sale of a condo your college student lived in before graduating. If you never rented out the property, it's a second home, not an investment.
Would reorganizing the business structure help? He is literally a "Mom & Pop" shop...no employees besides his wife and myself helping out (not taking salaries).=========>>I believe that that reorganizing his SO to either a corp, s- or reg C corp or LLC does not avoid paying CG taxes/ depre recapture sec `1250 tax on the sale of the rental pty; however, once you own rental or other income-producing property, you should consider putting it into a limited liability company. This can be a great way to protect your assets, while at the same time you can reap some tax advantages. The great thing about LLCs is that they offer the asset protection of a corp while at the same time giving you much more tax flexibility. For instance, if you?re the sole owner of an LLC, you can generally choose to be taxed as though it were a sole proprietorship. This means that income and capital gains from the LLC will pass through directly to you and you?ll pay taxes as an individual. There?s no separate tax on the LLC, so you?ll avoid double taxation. If the LLC has more than one member, it can choose to be taxed as a partnership. Again, the income and capital gains will pass through directly to the members.In either case, you can generally avoid many of the hassles of having a corporation, such as boards of directors, board and stockholder meetings, and elaborate corporate recordkeeping
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