ABC, Inc as purchased land on Jan 1, 2010 for $1,500,000. The firm has never used the land in operations and is holding it as an investment. On Jan 1, 2015 the land has a FMV of $4,400,000. The sole shareholder of ABC, Jeff wants to take the land out of the corporation and use it for personal purposes (to build a house on it).
A. If ABC issues Jeff a distribution of the land-what are the tax issues to ABC and to Jeff:
B. If ABC issues the land to Jeff as part of liquidating the corporation- what are the tax issues to ABC and to Jeff:
C. If ABC issues the land to Jeff as part of a redemption of some of Jeff’s stock in the corporation- what are the tax issues to ABC and to Jeff:
D. ABC issues the land to Jeff as part of a Ch 7 Section 368 transaction- what are the tax issues to ABC and to Jeff:
A.if abc issues jeff a distribution of the land.it will be treated as follows for the tax purpose:
There would be no long-term capital gains tax on the sale, but there would be regular corporate income tax on the sale if there were a gain realized on the sale. The reason for this is that C corporations do not have any preferential capital gains tax rates available to them. Generally, all of the income recognized by a business operating through a traditional C corporation is taxed at the corporate income tax rates that range from 15% up to 35%, depending upon the level of taxable income. Any asset sale by a corporation to a shareholder would be taxed if there were a gain on the sale, this includes a house. Furthermore, the sales price must represent what is called an arm’s length price. Arm’s length means it represents what an independent third party would pay for the home. If the sales price of the home was determined to be not at arm’s length by the IRS, then there are a host of distribution-related issues that could apply, and which are beyond the scope of this article.
B.If abc issues land for liquidating the corporation,then long term capital gain will be calculated.
calculation is as follows:
FAIR MARKET VALUE ON JAN 01 2015 44,00,000$
LESS:COST OF INDEXATION 1500000*1081/711 2280590$
(COST OF INDEXATION=PURCHASE PRICE*INDEX IN THE YEAR OF SALE/INDEX IN THE YEAR OF PURCHASE)
C.The sale of a house by abc as one of its shareholders to jeff would be treated as a long-term capital gain (if the corporation owned the house for more than one year). This gain would be passed through to the respective shareholders and taxed on their individual income tax returns. An abc corporation generally does not pay any income tax. All items of income and loss are passed through to the individual shareholders who must report these income or loss items on their individual income tax returns. There are other issues, such as depreciation recapture if the house were used for a business purpose,.
D.IF A COMPANY ISSUES LAND TO JEFF AS PART OF GIFT I.E,CH7 SECTION 368 TRANSACTION:
GIFTS were brought in the ambit of the Income-Tax Act with effect from September 1, 2004. The provisions initially applied to monetary gifts alone. However, from October 1, 2009, gifting of immovable property was also included as taxable income, along with movable property. Since then, immovable property, i.e., land or building or both, received as a gift, is taxable as income in the hands of the recipient.
However, there are certain circumstances under which a gift (including an immovable property) will not be subject to income tax. One such exception is when the value of the property as assessed for stamp duty purposes does not exceed R50,000. It is pertinent to note that if an immovable property is acquired for a consideration that is less than the stamp duty value of the property and the difference is more than R50,000, such difference will be considered to be a gift received by the purchaser and taxed accordingly.
Further, if the immovable property is received as a gift under the following circumstances, it will not be subject to income tax in the hands of the recipient: They are gift received from a relative, received on marriage, under a will, by way of inheritance, from a local authority, gift received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C) and gift received from any trust or institution registered u/s 12AA.
For this purpose, the following persons are considered to be ‘relatives’ of an individual — spouse of the individual, brother or sister and their spouses, brother or sister of the spouse of the individual as well as their spouses, brother or sister of either of the parents of the individual and their spouses, any lineal ascendant or descendant of the individual and their spouses.
So, if a wife receives a house as a gift from her husband, the gift will not be taxable as income in her hands. However, if she lets out the house and earns rental income, such income, instead of being taxed as her own income, will be clubbed with the income of her husband and taxed as his income. A similar treatment will apply to any capital gains she earns from the sale of the house. One, therefore, has to be aware of the provisions of the Act relating to clubbing of income as per which any income earned by the spouse or daughter in law of the individual out of assets transferred to them directly or indirectly will be clubbed with the income of the individual and taxed as his income.
An immovable property received as a gift, when sold, will be subject to income tax on the capital gain earned on the sale. For the purpose of determining the capital gains, the cost of acquisition will be taken to be the cost to the last owner who purchased it. Also, the holding period will be considered to be the entire period starting from the date when such owner first held it.