Tax questions. I have a rental property with huge capital gains (operate it under LLC). If I sell it to a third party in the normal course of business, can I take a huge commission ( I am also the real estate agent) since I prefer the income as ordinary vs. capital gains? Is this a tax strategy or tax evasion?

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Why would you prefer ordinary income vs capital gains?

I don’t don’t think there’s any reason to not take a commission if you want to, but I’d recommend since it’s a related party transaction that you take a market rate (6-7%). The commission would just reduce your proceeds on the sale and be ordinary income to you.

Also, would refrain from saying “normal course of business” on selling property, if you are in the business of buying and selling property you are a dealer not an investor (unless you want to be)

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Ordinary is typically taxed at a higher rate than capital gains so I would imagine you would want to leverage that as much as possible. I guess you could use the commission from the transaction the LLC pays you as a transaction cost which would reduce the taxable gain on the disposition.

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Anything outside of your normal business practice as a real estate agent would probably be scrutinized in the event you were audited. Whether tax strategy or tax evasion it doesn’t make much sense either. Ordinary income is taxed at higher rates than capital gains. Why do you prefer the ordinary income?

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Are you a single member LLC that owned the property sold?

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This is not ordinary income and this is not a regular course of business transaction.

You should look at your return to see if you have any loss carryovers to offset that cap gain.

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As a licensed RE agent, you are not allowed to charge commissions for your own or your immediate family properties that you sell. At least in New York and NJ it is illegal. But I would assume most/all States have similar rules.

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Because he is doing tax planning from the LLC perspective to deduct commission paid.

But, there are no loopholes at this level of simple plannings. It has to get way more complex combined with personal situation to be able to find tax saving opportunities.

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Not the first time I’ve heard someone ask a question and say they prefer ordinary income to capital gains.

Only reason I could think of is if you are prepared to deduct expenses against that commission on your schedule C.

Otherwise, ordinary income is taxed at a higher rate than capital gains.

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Everything comes down to reasonableness... take 6% of you are broker/ agent.... I'm guessing you have shot of expenses to show on the business side but little on the asset sale side.... remember: taxes are a good thing - it means you are making money

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