sell home to your corp or LLC to become a rental and claim $500k exemption?

Due on sale clauses are now permitted with respect to all loans made by federally chartered or insured banks, due to federal regulations promulgated a few years ago.

California had, by court decision, outlawed them as unreasonable restraints on alienation as contrary to public policy. But since such a large percentage of loans now do properly contain these clauses, it would be hard to continue to argue that they're contrary to public policy.

As a practical matter lenders will generally allow transfer to a borrower's wholly owned corporation, since the legal liability doesn't change much if at all - at least not in California.

If he's the only owner of the corporation, receiving the property in his own name might constitute a taxable redemption to the extent its market value exceeds his basis in the corporation.

If you're talking about an S-corp that conclusion would be different.

As one prominent federal judge famously said many years ago, it's ok to avoid taxes, just not to evade them.

Stu

I'm going to assume that your two questions are rhetorical and you are not looking for an answer.

For the record, I don't advocate entering into such a transaction without getting a PLR.

P.S. Re California. I believe there is a federal law that makes due on sale clauses on loans from federal banks enforceable in all states. In addition, CA Civil Code 2924.6 appears only to bar enforcement in limited situations.

2924.6. (a) An obligee may not accelerate the maturity date of the principal and accrued interest on any loan secured by a mortgage or deed of trust on residential real property solely by reason of any one or more of the following transfers in the title to the real property: (1) A transfer resulting from the death of an obligor where the transfer is to the spouse who is also an obligor. (2) A transfer by an obligor where the spouse becomes a coowner of the property. (3) A transfer resulting from a decree of dissolution of the marriage or legal separation or from a property settlement agreement incidental to such a decree which requires the obligor to continue to make the loan payments by which a spouse who is an obligor becomes the sole owner of the property. (4) A transfer by an obligor or obligors into an inter vivos trust in which the obligor or obligors are beneficiaries. (5) Such real property or any portion thereof is made subject to a junior encumbrance or lien. (b) Any waiver of the provisions of this section by an obligor is void and unenforceable and is contrary to public policy. (c) For the purposes of this section, "residential real property" means any real property which contains at least one but not more than four housing units. (d) This act applies only to loans executed or refinanced on or after January 1, 1976.

One final comment with regard to corporations.

IRC Section 351 is not an election.

Right. If you fit within its ambit, there's no tax effect on a transfer to a corporation.

The suggested scenario is not the typical §351 situation, so it's not obvious that it would apply. But I can certainly imagine the IRS arguing it, and a court being convinced by it.

Stu

Thanks for the clarification. That makes a lot more sense.

That's brilliant!!! As I recall leasehold improvements by the tenant are not considered taxable income to the landlord. There's no depreciation on the raw land, so there's nothing to recapture.

Stu

Thank you, but unfortunately I can't take credit for it as I read the idea 35 to 40 years ago.

Dick

First of all, this is NOT an AICPA Case Study, but rather it is a Case Study written by a Tax Attorney who adapted it from PPC's "Guide to Tax Planning for High Income Individuals" and published in the July 2008 issue of "The Tax Adviser". There is no indication that the Case Study was subjected to rigorous peer review.

Second, this Case Study is based on a PLR that appears to have been issued in 1983 under the pre-1986 Tax Act rules for tax deferment on the sale of primary residences. IMRHO a 25 year old PLR is of questionable reliability. Also I am under the impression that PLR's are only relevant for the person who requested the PLR.

Third, today someone wrote in another thread "depreciation recapture and the homeowners exemption" that the "Housing and Recovery Act of 2008" has changed the rules for Depreciation Recapture of rental property to primary residence conversions effective 1 January 2009. If that is correct, the tax benefits of such conversions have been greatly diminished.

Finally, an Auditor can disallow anything for any reason shifting the burden of proof to the taxpayer. I read it in a book, a newsletter, or on the Internet has never been an acceptable defense.

If I was still a University Professor, I would assign this Case Study as a research project in a Graduate course in either Taxation or Auditing and would be impressed by a paper that was able to defend it.

Dick