Identifying and Advising on Tax Law Issues (Sample Letter)

Dear Client,

I wish to pass my regards for accepting to consider my advice to you on matters involving tax. May I start by reminding you that taxation is a vital necessity every government uses in the light of administering the state operations.  The first important thing is to understand what kind of tax it is you have at hand. The United States has a rather complicated tax system that incorporates various types of taxes. With reference to the fact that you are dealing with the sale of a house, we are looking at a case of capital gains tax (NOLO N.p).

Understanding the provisions of capital gains tax according to the federal requirements is necessary also. The initial step is about calculating the applicable capital gain or the capital loss. That figure comes up as a result of taking the selling price and deducting the original cost of the house, other additional expenses incurred in so doing, as well as depreciation.

I am sure you are aware of the legal punishments subjected to those caught guilty of evading tax on the gain on property sale. In light of that, I wish to enlighten you on a better way through which you can legally pay less tax and avoid any legal inconveniences you might put yourself through if you implement your current plan. If you are not aware, may I enlighten you on the fact that there is a way to enjoy tax exclusion up to 250,000 dollars from capital gains received from selling a house. Filing for the exclusion as a couple could see you awarded up to 500,000 dollars from tax on capital gain.

I would like you to understand that since May 6, 1997, the full exclusion requires you to have owned the house for not less than two years before the sale. Again, as I have highlighted above, the gain on the house is not the gross difference between the house’s original cost price and the current price at which you are selling it. For example, since you bought the house at 500,000 dollars, and you are selling it at 850,000 dollars, your taxable gain is not 350,000 dollars. According to the provisions of the IFRS, several other vital expenses you have undergone in the period of owning that house are deducted from that figure. The expenses I am talking about are the deductible closing costs. The above may include any prepaid interest on the mortgage, as well as the amount of prorated property tax. The selling expenses are deducted as well. The selling costs include the commissions paid to the real estate brokers involved, any relating legal fees, costs of advertising, escrow fees, administrative fees, as well as any inspection fees paid. I am sure that by now you have seen the rationale as to why filing for tax on the sale of your house is more advantageous than evading (California Tax Board N.p).

In the presence of all the above, you might qualify for a full exclusion. If filed jointly, you will have to pay nothing since the exclusion will be 500,000 dollars. That amount is above the 350,000-dollar figure that is the maximum amount that can qualify for tax on capital gain on the sale of the house. On the other hand, if you file individually, qualifying for 250,000-dollar exclusion will reduce the 350,000 dollar gain on capital to only 100,000 dollars. Upon the deduction of the selling costs plus other deductible costs, the 100,000 will possibly reduce by half. In short, the benefits of filling for tax on the capital gain resulting from the sale of your house are far much better compared to the cost of covering for the evasion in the long run.

On the issue of the building in San Diego, I find it necessary that I should enlighten you further on provisions of Section 1031 according to the Internal Revenue Service (IRC). The rationale behind my advice on this section finds its basis in the fact that this section deals pretty much with the exchange of assets, which is what your transaction entails. The provisions of Section 1031 are relatively tricky, and the advice of an expert is usually advisable (Bankman, Griffith and Pratt 128).

May I enlighten you that the 1031exchange was not established for personal use but use in the real estate. Apparently, there are instances where the IRS may allow personal property exchanges such as exchanges involving paintings. However, transactions involving corporate stock do not qualify. The fact that you intend to complete this transaction with a real estate investor as the benefactor of the building solves that (Harp 170).

In light of the above, may I advise you on how best to undertake the exchange maintain the least inconveniences in terms of tax and general expenses. You should understand that the exchange will involve only you and the investor who you intend to end up with the house. The main problem might arise in finding a second party with the exact taste of the building. In the pursuit of overcoming this encumbrance, I suggest that you engage in a “delayed” exchange (Wood N.p). In this case, you shall require a middleman who shall keep the cash after the ‘sale’ of your property and use it to purchase the two shares in the co-op. In short, I am advising you to apply a swap kind of exchange.

However, it is necessary to take close adherence to timing rules as far as engaging in delayed exchange prevails. The first advises on the designation of the property replacement. Upon the sale of the property in question, the cash is received by the intermediary. Receiving the cash you will spoil the 1031 exchange (Legal Information Institute). You must remember to designate the replacement of your property within 45 days after the sale of the building. The above happens in the form of a written letter to the intermediary who should include the specification of the property for the exchange. The second timing rule relates to the closing of the delayed exchange transaction. If you choose to engage in a swap as per my advice, you should remember to close on the shares of co-op before 180 days are over since the sale of the building. You should take note that the two periods run concurrently to one another.

In summary, I advise you to file for the taxation of the capital gain resulting from the sale of the house. You will realize that doing so makes the taxable amount so insignificant that it is not worth the unrest resulting from living in fear of being identified as a tax defaulter. More so, I advise you to seek better understanding of the provisions of the Section 1031 of the IFS to stand the best chances of having a beneficial property exchange. However, if you feel the need to seek better understanding of my rationale, feel free to forward me your concerns.

Sincerely,

Works Cited

Bankman, Joseph, Thomas D. Griffith and Katherine Pratt. Federal Income Tax: Examples & Explanations. New York: Aspen Publishers Online, 2008.

California Tax Board. “REVENUE AND TAXATION CODE SECTION 18151-18181 .” 2010. leginfo.ca.gov. 7 April 2015 <http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=18001-19000&file=18151-18181>.

Harp, R. Kymn. Intent to Prosper. Bloomington: Xlibris Corporation, 2009.

Legal Information Institute. “26 U.S. Code § 1031 – Exchange of property held for productive use or investment.” 2015. cornell.edu. 7 April 2015 <https://www.law.cornell.edu/uscode/text/26/1031>.

NOLO. “Changes to the Capital Gains Tax Rules Under the American Taxpayer Relief Act.” 2014. nolo.com. 8 April 2015 <http://www.nolo.com/legal-encyclopedia/2012-is-your-last-chance-obtain-tax-free-investment-income.html>.

Wood, Robert W. “Ten Things to Know About 1031 Exchanges.” 2009. forbes.com. 7 April 2015 <http://www.forbes.com/2010/01/26/capital-gains-tax-1031-vacation-home-personal-finance-robert-wood.html>.

 

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