Achieving Tax-Deferred Status on Gain Will Be Difficult

Recently, I purchased some real estate and paid cash for it, with hopes of building a dental office on it in the future. I am selling other investment property and expect to receive a gain of approximately $40,000. How can I put all of this money toward the new building without having to pay capital gains taxes?

Charles Blair, DDS and

John McGill, MBA, CPA, JD

Question:

Recently, I purchased some real estate and paid cash for it, with hopes of building a dental office on it in the future. I am selling other investment property and expect to receive a gain of approximately $40,000. How can I put all of this money toward the new building without having to pay capital gains taxes?

Answer:

Achieving this result will be somewhat difficult due to the timing involved. You could have structured a tax-free exchange pursuant to Section 1031 of the Internal Revenue Code had you sold your investment property prior to, or simultaneously with, the purchase of this new professional property. As long as you met the requirements of Section 1031 and did not receive actual or constructive receipt of the cash, which would have been used for the purchases of the new property, you could have avoided all capital gains taxes on the transaction.

As it now stands, achieving tax-deferred status on the gain from the future sale will be considerably more difficult. The new property already is titled in your name and has been fully paid for, so there is no possibility of doing a tax-free exchange relating to the land itself. However, there may be a possibility of structuring a tax-free exchange with respect to the building construction. In some states, it is possible to sever title of the land and building, so that each is owned separately.

You should consult a real estate attorney to determine if this is possible in your state. If so, you could have another party constuct your new office building on the property, and upon completion of the project, swap your investment property, together with the difference in cash to him, in exchange for title to the newly-constructed office building. As long as the building is considered as real property and not personal property, this may qualify for tax-free exchange treatment.

You will need to determine if the taxes saved from this transaction justify the additional complexity and cost involved in arranging this tax-free exchange.

Question:

A colleague of mine told me that he read in the Blair/McGill Advisory that certain business cars could be purchased without paying the luxury tax, and also qualified for faster write-offs. I asked my accountant about this and he knew nothing about it. Can you provide some information?

Answer:

Sport utility vehicles that weigh in excess of 6,000 pounds fully loaded are not considered as passenger automobiles under the tax law. As a result, they are not subject to the 9 percent luxury tax (9 percent effective September, 1996) that applies to a car`s price to the extent that it exceeds $34,000 in 1996.

For example, assume you buy a sport utility vehicle costing $45,000 that weighs more than 6,000 pounds. If you know the law, you can convince the dealer not to impose the 10 percent excise tax and thus save $990 ($45,000-$34,00 x 9 percent). In addition, you are able to depreciate the full $45,000 cost of the vehicle over a six-year period, including a $9,000 depreciation deduction in the very first year. On the other hand, it would take approximately 23 years to fully depreciate this vehicle under the normal business car rules, where only a $3,060 depreciation deduction is allowed in the first year.

Several utility vehicles currently qualify for these tax breaks. They include the Chevrolet Suburban, Chevrolet Tahoe, GMC Yukon, Land Rover, Lexus LX 450, Mitsubishi Montero (some models) and Toyota Land Cruiser.

Question:

Sometime ago, I incorporated my dental practice as an Idaho corporation, and retained ownership of my dental and office equipment. Later, I formed a family limited partnership with my wife and I as general partners, and my children as limited partners, and transferred the office equipment thereto, along with certain pieces of real estate. The family limited partnership now leases the dental equipment to my dental corporation. What is the maximum legal dollar amount that the family limited partnership can charge to the corporation for the lease and how is this calculated?

Answer:

There is no maximum legal dollar limit on the rent that can be charged on the lease of such equipment. In order to be deductible, the rent must be reasonable, which means set at a fair-market rate that would be charged by an independent third party. The first step in determining this amount is to have the dental equipment appraised by a supply house or other equipment vendor. This appraisal can provide not only the fair-market value of the equipment, but also the monthly lease rate under which the supply company or other equipment vendor would agree to lease this equipment back to you if you sold it to them.

Generally, annual equipment lease rates run 25-30 percent of the equipment`s fair-market value for a five-year lease. However, you should use the actual values as determined by the appraisal for your particular situation to assure deduct- ibility and avoid IRS attack.

Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.

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