Turning personal property into business' property for spec home

Tax, SDIRAs & Cost Segregation
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Turning personal property into business' property for spec home

Jayme Walker
Developer · Bellingham, WA · Member since 2020 · 2 posts · 1 vote

My husband and I have an LLC - we build spec homes.

We personally own our own home on 2 acres. There is a split available, we have done a survey, and we are about to apply for the partial release with our mortgage company. We would continue living in our house on one acre, and on the other acre, we would build a spec house. We plan to sell the spec house in Spring 2022 and a few months later we will sell the house we live in. By then we will have lived here for over three years.

We want to put the acre lot in our business' name before we start building and I am wondering the best way to do this in terms of taxes and legal.

I understand that if we were to sell the empty lot to someone else, we would personally receive the money and would not have to pay capital gains tax. We currently could sell the lot for about $80K. The difference though is we would be "selling" to our own business and building on the lot, so I am wondering how to set everything up so that we don't have to pay taxes that we wouldn't have to pay if we sold to someone else.

Our mortgage company said we need to have a buyer in order to do the partial release (no transfer). So my idea is this:

  • -Business gets a private loan for $80K in 2021 for the land purchase. Business also gets a separate loan for the cost to build.
  • -Business uses $80K loan to "buy" lot from ourselves
  • -Once we receive the $80K from our business, we then immediately lend the $80K back to our business to finance the land purchase part of the project.
  • -Business then immediately pays back the private loan to family right away. Business still has the cost to build loan and now has a land loan to us personally.
  • -We complete the project in 2022 and put it up for sale.
  • -House sells. Business pays out the cost to build loan, closing fees, etc. AND the personal $80K land loan back to ourselves.
  • -Business pays income tax on whatever is left after that, which excludes the $80K.

Does this makes sense? Is it okay to do? Is there are better way? Is our LLC considered a separate entity from us? Any considerations or issues we should be aware of?

I have reached out to an accountant and was confused by their answer, so I thought I would post here.

Thank you so much!

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  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    5y
    Whether or not the transaction will be respected depends on how the LLC is tax...e.g. disregarded entity, partnership, S Corp, etc.

    It's a valid strategy to sell the raw law to a development entity.  There are a few landmines that a tax advisor should go over, and one or two of the steps you listed could be eliminated or done differently.
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    • Eamonn McElroy
      Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
      5y
      Originally posted by @Eamonn McElroy:
      Whether or not the transaction will be respected depends on how the LLC is tax...e.g. disregarded entity, partnership, S Corp, etc.

      It's a valid strategy to sell the raw law to a development entity.  There are a few landmines that a tax advisor should go over, and one or two of the steps you listed could be eliminated or done differently.
      For some reason I can't reply directly to you.

      In that situation, a transaction between you and the disregarded entity (such as a sale) would generally not be respected for federal income tax purposes.

      What we generally need is a partnership, S Corp or C Corp.

      I work with similar fact patterns and we usually see a landbank or similar company acquire raw land, then later sell to an S Corp for development.  This allows appreciation between acquisition and when development starts to be treated as a capital gain, and the development entity gets a stepped up basis in the asset.

      A similar arrangement might work to allow you to use a partial Sec 121 exclusion.  But it's hard to tell because there are a lot of details left out.  Also hard to tell if the juice is worth the squeeze.
      0Reply
    • Jayme Walker
      OP
      Developer · Bellingham, WA · Member since 2020 · 2 posts · 1 vote
      5y
      Originally posted by @Eamonn McElroy:
      Whether or not the transaction will be respected depends on how the LLC is tax...e.g. disregarded entity, partnership, S Corp, etc.

      It's a valid strategy to sell the raw law to a development entity.  There are a few landmines that a tax advisor should go over, and one or two of the steps you listed could be eliminated or done differently.

      Thank you for your response. We are a disregarded entity. We are in a community property state, and my husband and I both own the business.

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