I have been told by the seller of an MHP in FL (that I am placing under contract) that in order for him to avoid double taxation, he needs to sell shares in the corporation that owns the assets, instead of selling the assets in a more classic transaction format.Ultimately, 3 yrs from now, he indicated that I can transfer the deeds and shares into a separate wholly owned LLC, which is my preferred form of ownership.A red flag instantly went up in my mind, because I am sure there are various precautionary measures I would need to take in order to do this type of transaction, while managing risk effectively. The first and most obvious issue is how to get a full release of liability from any claim based on an event that occurred prior to my owning the shares.I am unsure of what other issues there are. Of course I will get title insurance, and perhaps also run a business bureau check on the owning entity, and criminal background check on the seller, to make sure there is no history of issues.Any other thoughts? Am I missing the bigger picture, e.g. is this a “deal breaker”?Thank you!jkmhp2
Don’t do it. When you buy the shares, you buy into all of his liability, including lawsuits that have not even been filed yet. You have to buy the asset and not the stock, period. I understand that he does not want to be taxed, but that’s life.And, yes, it’s a deal breaker.
There is no double taxation issue the seller would face - not that I can think of. The MHP is probably held in an LLC, which is a ‘pass-through’ or disregarded entity for tax reasons (LLCs do, however, provide asset protection, but that’s a different matter). So it should not matter to the seller whether he sells the entity or the asset out of the entity.It sounds very suspicious that the seller wants you to buy the entity. That is just not the way real estate works. Everybody sets up their own new entity (I favor land trusts) to take title.My 2 cents worth,-jl-
Sounds fishy to me, jkmhp2. And he may already have tax problems, which you don’t want to be a part of by buying shares, if he is saying he is trying to avoid double taxation. And as far as paying taxes go, paying them is a happy note in that it means you’re making money. Granted, CA has some of the highest taxes in the US, but they still need to be paid when due. So, it sounds like a deal breaker to me.Jim Allen
If the assets are held by a C corp, then the seller is right, there would be double taxation, once when the asset is sold (taxed at potentially a very high corporate tax rate), and a second time when the C corp pays the seller (either via a dividend or as a salary). For this reason, it’s probably almost never a good idea to own real estate in a C corp.I believe there may be a way for the seller to get around the double taxation, but that would involve getting a corporate tax attorney involved. His problem, not yours. I don’t think he’s trying to do anything dishonest, but he created the problem in the first place by owning real estate in a C corp.Ed
Frank, I have a similar/maybe the same situation as jkmhp2. Would you advise the same?
The park owner says that the park is owned in an S-corporation (jkmhp2 did not mention whether his case involves S-corporation). The S-corporation would be sold to me as a stock. The S-corporation would continue to hold the title to the park. So, no change of ownership of the park. And, there would be no sales tax on the stock sale.