RitaB Posted June 11, 2007 Report Share Posted June 11, 2007 Two members (both treated as general partners) in an LLC called "X & Y Construction, LLC" are aggravating me to death about a spec house they are selling. Apparently, they are gonna make a butt load of money when it sells and don't want to pay any taxes (naturally). First of all, for some reason they thought since it was a spec house (not a custom home under contract to a specific buyer from the start) the profit would not be subject to ordinary income tax and SE tax. But, hey, that's their business; they've done it for years, just in another state. Now, they're back today telling me that one of their daughters, also in construction (that's it, that's all she does), said her banker was able to "roll over (big rolling hand motion) all her profits from the sale of a spec house and shelter all that gain." I gotta tell you, I have no idea what the banker is doing. But I did ask my client how the banker knows what's going on with the daughter's tax return. Is the daughter calling spec houses, (that she builds in her ongoing trade), investment property and doing a 1031 exchange to defer the capital gain? That can't be justified, can it, since this is not a one time wild hair to build a spec house? These people earn their living conducting a construction business, for Pete's sake. Is something going on here that I'm not seeing? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted June 11, 2007 Report Share Posted June 11, 2007 The only thing 'going on' is that nonprofessionals are giving out bad advice, and your clients are just hoping that you will follow along. Hang in there, you are right, and they are wrong. Unless they are willing to value your professional knowledge higher than that of these nonprofessionals, you are better off without them as clients. Now, I'm not suggesting, as some like to do, that you just 'fire them' out of hand. I'm suggesting that you try educating them to why they can not go down that road. But, if they refuse your advice once you have explained it carefully, then your best bet is to tell them that you are not willing to pay penalties for preparing a fraudulent return. If that does not get through to them, you have not lost anything worth keeping. Quote Link to comment Share on other sites More sharing options...
jainen Posted June 11, 2007 Report Share Posted June 11, 2007 <<nonprofessionals are giving out bad advice<< The clients say that somebody told them that somebody ELSE told her about a different transaction. How could that come out as bad advice? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted June 11, 2007 Report Share Posted June 11, 2007 Well, admittedly, anything we are told 'second-hand' is always suspect. But since this was not the typical 'my buddy did such-and-such...' but a daughter, I was giving it just a bit more reliability that, in fact, something was done on the daughter's return that was not correct treatment. It could, of course, be that the information from the daughter was misunderstood, or some other significant factor was left out, etc. But odds are high, in this particular example, as given, that doing anything other than treating it as ordinary business income would be 'bad advice'. Quote Link to comment Share on other sites More sharing options...
RitaB Posted June 11, 2007 Author Report Share Posted June 11, 2007 But since this was not the typical 'my buddy did such-and-such...' but a daughter, I was giving it just a bit more reliability that, in fact, something was done on the daughter's return that was not correct treatment. Yes, and I have a feeling that preparers before me have reported spec houses for my clients on Sch D instead of Sch C (they have just become an LLC, and were sole proprietors in the states they moved here from). These guys really don't seem like scoundrels to me. I just think their returns have been prepared incorrectly in the past. They seem to be willing to do things correctly, they just don't know what's right, and maybe they have been misled in the past. In fact, we have a local CPA that used to report spec houses on Sch D all the time, maybe still does. Maybe I can find some good articles, along with IRS publications, that will help reinforce what I'm telling them. Thanks for your help! Quote Link to comment Share on other sites More sharing options...
Daune/CA Posted June 11, 2007 Report Share Posted June 11, 2007 Several years ago, I had a client that was in construction. He would build a "spec house" and then live in it to build the next one, being sure it was for enough time to qualify as his personal residence, and then postpone the gain into the new residence, when it was built. This finally became very advantageous for him when the new laws became effective with larger exclusion. He has since retired from construction and is living in a duplex that he built and rents out the other side. Just a thought that this maybe what they have in mind. Quote Link to comment Share on other sites More sharing options...
RitaB Posted June 11, 2007 Author Report Share Posted June 11, 2007 Several years ago, I had a client that was in construction. He would build a "spec house" and then live in it to build the next one, being sure it was for enough time to qualify as his personal residence, and then postpone the gain into the new residence, when it was built. This finally became very advantageous for him when the new laws became effective with larger exclusion. He has since retired from construction and is living in a duplex that he built and rents out the other side. Just a thought that this maybe what they have in mind. Well, they haven't lived in this spec house (I don't know about the daughter), but I do see a lot of builders moving every two years. I don't like it very much when I see them making out like bandits and not paying taxes, but the Section 121 exclusion was pretty cool when we sold our house! B) Quote Link to comment Share on other sites More sharing options...
jainen Posted June 11, 2007 Report Share Posted June 11, 2007 >>I see them making out like bandits<< Bandits are outlaws. The proper application of Section 121 is, well, proper. By "making out" do you mean that back-seat-of-my-Oldsmobile thing? Because that's the only improper aspect that seems to apply. Quote Link to comment Share on other sites More sharing options...
JohnH Posted June 11, 2007 Report Share Posted June 11, 2007 I still don't see anything improper (including the back seat of the Oldsmobile thing). Quote Link to comment Share on other sites More sharing options...
RitaB Posted June 12, 2007 Author Report Share Posted June 12, 2007 jainen - Here's what I said: "I don't like it very much when I see them making out like bandits and not paying taxes." How's this: I don't like it very much when I see them making out like bandits and not paying taxes. Making out like a bandit means "to be highly successful in a given enterprise." Heck, I make out like a bandit (not in the Oldsmobile sense) sometimes, too. But, I always have to pay taxes on the gain. I just meant I didn't like it much when people get to avoid paying taxes on business income. So do you have an opinion about what the daughter is doing to avoid taxes on the spec house? Quote Link to comment Share on other sites More sharing options...
Daune/CA Posted June 12, 2007 Report Share Posted June 12, 2007 jainen - Here's what I said: "I don't like it very much when I see them making out like bandits and not paying taxes." making out like bandits and not paying taxes. I do not consider them bandits when they use the tax laws legally. If they did not use the laws that are there for all to use, I would count them as "fools". Daune/CA Quote Link to comment Share on other sites More sharing options...
RitaB Posted June 12, 2007 Author Report Share Posted June 12, 2007 I do not consider them bandits when they use the tax laws legally. Daune/CA I do not consider them bandits, either, and I did not mean to imply that. I consider them "highly successful in a given enterprise." I'm just jealous that their business income is tax free, and mine is not. It's more of a comment on the legal tax shelter, not the builders. The builders are smart cookies, I agree. Wish I could find something similar for me! Quote Link to comment Share on other sites More sharing options...
JohnH Posted June 12, 2007 Report Share Posted June 12, 2007 Funny how our perspective changes based on whose ox is being gored. I'm not criticizing your attitude - we all have those reactions from time-to-time. I remember serving on a church board many years ago and explaining how the minister's parsonage allowance works. The wealthiest and most vocal member of the board spoke up with a negative comment about how he wished he could deduct his utilites and insinuating that it was "unfair". He was not a client, so I pointed out that he got extra exemptions for him and his wife being over 65 (this tells you how many years ago this happened), and that the "fair" thing for him to do would be to forego that benefit since all us younger people (including the pastor) were not entitled to it. That discussion didn't go any further, although I assumed that if he ever needed to change accountants I would probably not be in the running. Quote Link to comment Share on other sites More sharing options...
TaxmannEA Posted June 13, 2007 Report Share Posted June 13, 2007 Just to confuse things a bit more: I once came across a developer who would build a "model home" in a new area and use it to meet clients as well as a model. He would then custom build the rest of the development, but would treat the model as a business asset. (Part advertisement, part office and show floor.) The model home would then go off on 4797. I never handled that transaction myself, but ran across it in a later year. I'm sure that the "banker" is using a logic chain for the tax treatment that would hold up in any barbershop in the land! Quote Link to comment Share on other sites More sharing options...
RitaB Posted June 13, 2007 Author Report Share Posted June 13, 2007 I'm sure that the "banker" is using a logic chain for the tax treatment that would hold up in any barbershop in the land! I think you're right, but it seems that these folks are having no problem getting it past the IRS, since these two guys think they've always paid capital gains tax on their spec house profits in the past. (Course, you know how clients sometimes don't know what happened.) I wonder if the "banker" is charging the daughter more than the correct tax would be... I am curious to see what they tell me next time they come in! Quote Link to comment Share on other sites More sharing options...
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