Discussion:Buying RE held in a C Corp
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Discussion Forum Index --> Tax Questions --> Buying RE held in a C Corp
| 19 July 2007 | |
| I have an individual who is only interested in buying property held in a C corp. I happen to have some property held in an ordinary LLC, but he is not interested. I do have a partner that has a commercial property held in a C corp because of foreign ownership. Can someone explain to me why this buyer is only interested in RE held in a C Corp, and potentially how such a transaction might look. The cost of the property was roughly 5 million and the fair market value is close to around 10 million. | |
| 19 July 2007 | |
| I'm sure he's been listening to the sage advice of Corptaxhelp who continues to stress the RE inside a C corp can be purchased by the buyer at a discount by purchasing the stock of the corporation holding the RE, netting more to the seller. BTW, foreign ownership is one of the few good reasons to intentionally own RE inside a C corp. | |
Corptaxhelp (talk|edits) said: | July 20, 2007 |
| Your friend's property has a basis below $5M thanks to depreciation. Let's call it $4M just as a guess. They FMV is $10M. Were the corporation to sell the real estate, it would owe $2.4M in taxes (roughly 40% of the $6M gain). So, a $10M sale nets the shareholders just $7.6M.
Some investors see that problem as an opportunity. They might look to buy the stock of the corporation to own the real estate since they could buy it at a tax-affected price. Instead of dropping $10M to get the property, they'd look to acquire the corporation at, maybe, $8M. Even though the purchase price is $2M less, the shareholders net $400,000 more. <Begin Soap Box> The hardest part of the transaction is talking a real estate broker into acting in the client's best interest. Time and time again, I have run into situations where the broker simply would not present a stock offer to the seller. The broker sees that $2M price swing as taking $60,000 to $120,000 (3%-6%) out of his pocket instead of as putting $400,000 more into the client's pocket. While you'd think professional ethics or some sort of fiduciary responsibility would require the broker to suggest the client take the offer, that is not often the case. (And, really, any reputable client and buyer would make sure to fairly compensate the broker so even their fear is irrational.) I guess it could just be that the real estate broker doesn't understand the transaction, doesn't understand that tax implications and doesn't want to look dumb in front of the client so it may not be malevolence. Still, it is very frustrating. A simple conference call between the client, his CPA and the broker would go a long way toward heading off a massive and surprising tax bill at the end of the transaction. </End Soap Box> Once you agree on a price, the attorneys and accountants take over to draw the share purchase agreement and work out the details. Make sure the buyer picks up most of the transactional costs since they will be higher than if you simple sold a piece of real estate. There isn't any reason you should pay for that additional work. Amersas, if you really want to get into the nitty-gritty of the transaction, let me know either here or by email. | |
| 20 July 2007 | |
| <Begin Soap Box>
Stop thinking that all tax advisors are CPAs. Enrolled Agents just might get the job done as well. <End Soap Box> | |
Corptaxhelp (talk|edits) said: | July 20, 2007 |
| You are absolutely right. I use CPA as shorthand to mean all qualified advisors. My apologies. If you see me do it again, you're welcome to rap my knucles again.
(Is 'CPA' the only letters you don't have after your name? {grin}) | |
| 20 July 2007 | |
| Corptaxhelp is correct as long as the real estate is discounted by the present value of the decreased cash flow impact due to no change in depreciable value. In our area, that discount is not realized in the market price. | |
| 20 July 2007 | |
| Also, if you have a C Corp with large loss carry forward, you could buy property at discounted price and use the loss to avoid tax on the gain upon sale. | |
Bottom Line (talk|edits) said: | 21 July 2007 |
| Remind the RE sales person that they may have a state mandated oblication to present all offers. (In FL they do.) | |
Corptaxhelp (talk|edits) said: | July 22, 2007 |
| Bottom, Florida brokers get around that rule by saying a stock offer for a corporation is not a transaction under which they are bound by FREC rules. Several I have spoken with say that sort of offer is not required to be presented. Even the brokers that do present the offer don't take the time to educate the client as to the value of the deal... 'Mr. Client have received two offers for your property... one was for $10M and the other is for $7M. Which should we accept?' Unless the client understands that the $7M offer puts a million more dollars net in his pocket, the lower offer will never fly. | |
