Family Sale or Gift and Leaseback

Family Sale/Gift and Leaseback

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Taxpayers who own a business are often reluctant to give any part of the business to their children - even to save taxes. Another way to shift income to children when you own a business is to lease business property from them. The property can be an office building or warehouse, computer or telephone equipment, cars, trucks or office equipment. There are two basic ways that you can provide your children with the resources to acquire the property that your business will lease.

a. A gift and leaseback arrangement works when you have direct (personal) ownership of some property that is being used by or rented by your business. You can then make a gift of that property to a child or to a trust (or limited partnership) for all of your children. Your business would then enter into a rental or lease agreement with the trust, partnership or a guardian of the child.

b. A sale and leaseback is the more common arrangement when your corporation owns the property. Corporations can't make non taxable gifts. Any transfer of property by a corporation is presumed to be a sale, compensation, or a dividend. In order to make a gift to a child, your corporation would first have to make a taxable distribution of the property to you. An alternative to that is for the corporation to sell the property to a trust and to then lease the property back from the trust.

Both types of leaseback arrangements have been the subject of frequent court cases between taxpayers and the IRS. These cases have helped to establish "ground rules" that must be followed if you want to avoid having the transaction overturned by the IRS. Your tax advisor should be able to find an abundance of information on these subjects.

Sales and leaseback transactions are not subject to gift taxes as long as the sale is a bone fide transaction and the sales price is equal to the fair market value of the related property.

A gift of property and a leaseback of the property would be a gift that would usually require a gift tax return. (The amounts involved are usually much more than $11,000.)

Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/ Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/

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