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How The Elites Execute Their Real Estate Tax Planning

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According salon.com. When William Koch decided to expand his Cape Cod home, he wanted the neighboring 26-acre compound so badly, that he paid double the $29.5 million appraised value for it. Koch paid $63,744,920 to be exact.

He bought the property through an LLC, and he added 26 acres to his existing property and ended up with a peninsula that increased his privacy, a 7,000 square foot mansion, a thousand foot of waterfront, including a beach house, extensive gardens, and even a tennis court.

Typically, if you sell a home at a loss after the market tanked or after paying too much, you get no tax deduction for that. In the case of the Cape Cod beach house for William Koch, different rules exist.  In the above example, Bill Koch deducted $42,637,729 in personal losses.

This was made possible because the property was bought through the above mentioned LLC.  SO Koch deducted the total premium he paid for the property as well as an additional $8 million.

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So even though losses like these cannot be deducted on personal residences, Koch’s residence was categorized as an investment property. He used an S corporation to acquire it, and this falls outside the current definition of a private home.

The previous owner of the Cape Cod property was an unrelated party.  Koch purchased the stock of the subchapter S corporation.

Oxbow Carbon LLC is the Koch firm that prepared the tax returns in question as well as Koch’s tax returns. Its former CEO, Charles Middleton, alleged in a whistleblower complaint that Koch committed tax fraud. It has been publicized that the IRS missed Koch’s crimes because the agency does not focus on real estate record since it concentrates on income.

Middleton’s allegations did not impress the IRS. It seems that the IRS saw no reason to even follow up on the complaint. The file was closed.

Middleton, who was fired by Oxbow Carbon seems disgruntled about his dismissal, which the company said, were for cause. Middleton offered a conspiracy theory to explain his dismissal. He was fired he says after he discovered that Oxbow fraudulently reported US profits as earned in the Bahamas in 2016. He also reported to the IRS that key documents of Oxbow and Koch were not disclosed to the IRS during audits for the 2011 & 2012 tax years. The IRS closed these audits without making any changes.

The transaction that created the deductible losses for Koch did not even include a sale of the property.  Koch used a tax gambit instead.

 

Koch bought the property in Cape Cod through Indian Point LLC which he declared an S Corporation.  Afterward, Koch closed Indian Point by liquidating it.  Under the rules of liquidation, all internal gains and losses have to be taken into consideration.

When Koch liquidated the subchapter S corporation, he made a loss of $42 million. This was offset by a gain to the S corporation on the distribution, for a net loss of $33 million.

Put differently, under the rules of liquidation, Koch reported a gain of $8,819,817 on a portion of the land that was undervalued, and then he offset his gain against his more than $42 million loss (the difference between the $63 million paid and the close-out value of $19.5 million).

The tax code allows all taxpayers to deduct losses on investment properties lawfully.  In this case, the stock of the S corporation was the investment property.

 

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In the end, Koch benefitted personally to the effect of a personal tax benefit of $8 million. Since no regulations exist to force Koch as an LLC owner to offer income verification, understated income, and overstated deductions stand more often than not.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Real Estate Investments. 

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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