Intermediary to Capital Gains

By Jones, Leigh | THE JOURNAL RECORD, January 27, 1997 | Go to article overview

Intermediary to Capital Gains


Jones, Leigh, THE JOURNAL RECORD


Local attorney Dal Houston hopes to cash in on a little-known tax deferment strategy while at the same time helping businesses and investors save big bucks on capital gains.

As the president of the newly-formed Phoenix Group, Inc., Houston is what's known as a qualified intermediary -- an IRS-endorsed middleman whose role in transactions involving real estate, business equipment and livestock may completely eliminate capital gains taxes for sellers.

"It's not a tax loophole," Houston explains. Instead, the Internal Revenue Service actually maps out how taxpayers can use a qualified intermediary to avoid capital gains taxes -- a potential 28 percent gouge -- when individuals make money on the sale of business property. It works like this. A property owner has a parcel of land he wishes to sell, and he's located a potential buyer. However, prior to finalizing the sale, the owner and Houston enter into an agreement whereby the owner exchanges his property and the rights in this property to the Phoenix Group. When the sale is finalized, the Phoenix Group is given the money from the sale. The company holds these funds in a separate bank account until the seller can find replacement property, which he has 45 days to do. Houston then closes the deal for the seller by using the money from the sale of the first parcel of land. Any interest accrued on the account goes to the seller. The glaring question, says Houston, is "why do sellers need an intermediary?" The answer is simple. Without the intermediary, the IRS requires the seller to pay capital gains taxes on the money received from the sale of the parcel, even if the seller immediately turns around and buys replacement property. By placing the proceeds in the hands of Houston's company, that capital gain is avoided. Houston says the second most asked question is "what keeps him from running off with the loot?" He readily has a solution. "Upon the deposit of funds the bank will issue a standby letter of credit with the client as beneficiary. This letter of credit will assure that the client will be protected from misapplication of funds," Houston explains. Houston does have some competition from title companies who sometimes act as qualified intermediaries in land transactions. Linda Cable, vice president of Lawyers Title in Oklahoma City, says her company acts as a qualified intermediary about two or three times a month, and she says that number is increasing as people become more aware of the tax benefits. But in addition to offering land deals, Houston hopes to tap into the equipment market with his business. …

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