Tax question relating to a gift of real estate (I asked similar question before but need more opinions)?

Question

I work for a company that lays out and designs residential subdivision projects. My boss is the owner of the company, and we've been lifelong friends.

He has worked out a deal with a developer wherein instead of charging our normal fees for designing his project, the developer is going to give my boss 3 lots in the development. EACH of these lots will be valued at approximately 150,000-200,000 dollars.

My boss has said he is going to outright GIVE me one of the three lots. I'm trying to figure out the best way to do this so that it minimizes the tax hit on both of us...

My boss and I have a side company we set up this year, an LLC with he and I as the only partners. Its purpose is to buy and develop real estate.

So, my questions are:

1. If my boss gives me a lot, is it considered a "bonus," and thus taxable as income, or is it a "gift?" What are the tax implications of the latter, if that's what it is?

2. Would there be any advantage to (see more below)

Question 2, continued...
Would there be any advantage in my boss deeding my lot over to our LLC? Or would the tax rate be even higher?

Question 3. Another alternative my boss is considering is for the developer to deed him 2 lots, and then deed the other lot to me. This way, my boss is not involved in the transaction of me receiving my lot. Is there any tax advantage to doing it that way?

We're just looking for legal strategies to effect this transfer that would cause the least amount of tax hit to both of us. Any advice or other options would be appreciated!

Wayne Z... What if my boss "gifted" the lot to my wife, instead of to me?

PLEASE UNDERSTAND... Neither me nor my boss is trying to "get away" with anything! We're simply looking for the best LEGAL strategy to minimize our tax burden. We're not interested in violating any laws.

Answer 1

I don't think there's any way out of this. Normally, "gifts" are not taxable to the person who receives it, but in this case the lots would take the place of the fee. So your boss has income equal to the value of the lots at the time he receives them. He possibly could "gift" you a lot, and there would be no tax affect to you, but the IRS would probably challenge it and say that it was a bonus. You might win, and you might lose. If it is a "gift" to you (which if he's not in the habit of giving you a bonus after a successful job, it could wind up as a gift, considering you've been lifelong friends) then there is no tax to you for receiving the gift, but there would be taxes when you sold the lot. If you held the lot for more than 1 year it would be taxed to you as long-term capital gain, which is taxed at a maximum rate of 15% (5% for those in the 10 or 15% brackets). Your boss would also have capital gains taxes as well if he sold his lots for more than they were worth when he receives them. I don't think you both can avoid taxes, but I have given you my best idea to minimize them.

Answer 2

Don't listen to some of these people complaining about realtor commissions. They obviously haven't been on the side where an agent get screwed by a buyer or seller and spent money on advertising or wasted time showing listings. Time is everything. But anyway, this is an easy question, If you want to..then do it. If it makes you feel better than do it. Don't do it if you're doing it out of a sense of obligation, then absolutely not. Realtors don't expect a thing from you, but it makes us all feel good when someone recognizes our efforts. Maybe the realtor gave you a really good experience and made you enjoy the whole experience. Whatever, do what your heart tells you to do. A realtor doesn't need a basket of suasage and cheese, even though it is the thought that counts. A sincere hand written letter to me, and a CC'd email to all your friends telling them how great I was and that they should use me next time would be the BEST gift you could give me. Congratulations on your home.

Answer 3

Since this is coming from your employer it will be treated as a bonus by the IRS. It will be fully taxable and is subject to withholding as well. Employers cannot give bona-fide gifts to their employees.

The lots that your boss gets from the developer are treated as barter or exchange income and they are taxable to your boss as if he had received the cash equivalent. Businesses cannot give bona-fide gifts to their vendors or customers and are severely constrained in the gifts that they can give to others.

The IRS is going to look at this from the "arms length" perspective. They can sniff out this type of subterfuge pretty easily. The bottom line is that this is all income to someone and must be reported as such.

Answer 4

You have strong answers provided to you.

Your solutions fall under the "bartering" category. It is an exchange of goods for services rendered. As such, it is taxable as ordinary income ... to you.

It matters not whether you call it a gift ... or tranfer it to your wife (that would be deemed income to you and a gift from you to her covered by the Unlimited Marital deduction as long as she is a citizen).

As to the impact of having the fee (value of the lots transferred) paid to your LLC ... that depends on whether your LLC elected to be taxed as a partnership or a corporation and then whether the corporation elected S corp status.

Answer 5

This would be taxable as compensation to you. You would pay tax on the value when you receive it and you would need to make a section 83b election to be able to obtain capital gain treatment on the increase in value when you sell it.

Answer 6

As the lot is compensation for services, it is taxed as ordinary income.

An employer (or vendor) can not give "gifts" to employees.

You be taxed as if you received $150-200k in cash and then bought a lot.