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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120797  
Subject: Re: complicate vacation home transaction Date: 2/6/2004 5:05 AM
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set up NV corp.

A waste of time unless you're a Nevada resident. And I assume that you're not, as you mention a state income tax below. The corporation will be doing business in your home state, so it will need to register with your Secretary of State to legally do business. Now you have to file information each year with both Nevada AND your home state. Further, your corporate accountant will not be as familiar with Nevada requirements as s/he will be with your home state. So the cost of compliance will be higher.

Granted, Nevada has some corporate secrecy. But the required registration in your home state will blow that out of the water.

purchase 100 shares of corp at 1000 each.

You could also purchase one share at $100,000, or 1000 shares at $100 each, or 100,000 shares at $1 each. It is really immaterial unless you plan on selling part of your corporation in the future. And I suspect you don't.

NV corp makes loan to me securing purchas of home n amount of 100k
I pay 10% interest on loan to corp.


Ok.

Results(?):
I can deduct 10k in interest from my personal taxes (assume 40% Tax made up of 31% fed and 8% state) = tax savings of 4000


Roughly correct. The real number will be a bit lower. Since you're paying less state income taxes, you'll have less of them to deduct on your federal return. And that will increase your Federal taxes a bit.

corp gets 10k in income (assume 15% fed tax no state tax and no deductions -- trying to be conservative here) = taxes of 1500

Sorry. This would be considered a Personal Holding Company. It's Federal tax rate will be the top individual rate, or 35%. And you will have to pay your home state income taxes.

net tax savings = 2500

Nope. Due to the PHC, this will turn around to a tax INcrease.

8500 of my money now sitting in corp for its investment (but subject to some flavor of taxation at pay out from corp).

You're also forgetting that, as an officer of the corp, you need to be paid for your corporate duties. Granted, they're pretty minimal, so there won't be much of a salary. But there really should be one, along with the associated payroll taxes.

There's also the annual compliance costs: tax return prep, corporate minutes, filing fees, and other such stuff. Individually, not much, but they could come up to as much as $1000 per year if you hire pros to do the work.

Alternative:
pay cash
10,000 taxed at 40% leaves 6,00 for investment each year.


I don't know where you're coming up with the $10k number.

You'll actually have somewhat less income, depending on what the $100k is currently invested in. Cash and equivalents aren't earning much, but your long-term opportunity cost of stocks would probably be around 7%. So if the money is in equities, you'll have about $7k less in income each year on which to pay taxes.

--Peter
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