Tax-free exchange

Following yesterday's post, "Uh oh, you owe," here's how the owner could minimize taxes paid.

...The owner of the old house consulted his tax lawyer on how to go about leasing the property. His lawyer advised that he should put up a corporation so that in the future, his other (personal) assets could be shielded from being classified as ordinary assets (used for business).

Owner: How do I transfer the property to the corporation? Do I have to sell the property to my company and be subjected to capital gains tax?

Lawyer: You could transfer the property via the "Tax-Free Exchange of Shares" (TFES) method. You only have to pay for Doc. Stamp Tax.

Owner: Oh, I heard about that method. If I remember correctly, the BIR sat on those applications, and it took forever to get their approval...

Lawyer: That was true up until recently. In 2020, the Supreme Court issued a ruling that prevented the BIR from questioning these transactions. Moreover, tax laws passed in 2022 (CREATE Law) encourages people to use this method. That is to say, applications for TFES are now being entertained.

Owner: Okay, I understand. And then what should I do?

Lawyer: Get and retain a licensed accountant to handle your books (as opposed to merely a bookkeeper). You want an accountant who fully understands your future plans. For example, your accountant should know how to book the asset in the corp's balance sheet (e.g., financial asset vs. inventory vs. property, plant, and equipment). So in the future, when you sell the property, you could claim the value as "cost of goods" to minimize the taxable income.

Owner: Whoa! That accountant sounds expensive!

Lawyer: In the short term, yes. However, he could save you millions in the future.