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Discussion:C-Corp owning real property again

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Discussion Forum Index --> Basic Tax Questions --> C-Corp owning real property again

Discussion Forum Index --> Tax Questions --> C-Corp owning real property again

Sunny (talk|edits) said:

31 August 2008
I have searched this forum and see quite a few posts discussing why this is something to avoid. I don't seem to have much luck finding how to fix the problem. I'd appreciate the links.

Client's previous accountant/attorney put a commercial building in his C-Corp. Renting the building to the owner's another business is its only activity. The corp has $200K loss carryovers from prior 6 years' renting but $250K appreciation in the FMV of the building if sold today.

What will be the best way to get the building out of the C-Corp? Will it be wise to set up an LLC and have C-Corp sell the building to the LLC? Upon sale, will the $200K and $250K offset each other,leaving the owner to pay taxes on the $50K? I know I need to do some reading, but any initial guidance and feedback will be greatly appreciated. Thank you in advance.

Uncle Sam (talk|edits) said:

1 September 2008
Off top of head - no tax rationale -

How about distributing building to shareholder as a property distribution? You mentioned loss carryovers, but didn't mention IF there are AEP from prior years that could sustain a liquidation distribution. Then after a year, have client sell the building personally?

Wrightcpa (talk|edits) said:

1 September 2008
A distribution to the shareholder would be treated as a sale at fmv. And if you sell it to a related entity you need to look into the rules for related party transactions.

The suspended losses can offset a gain on a complete disposition, so if the property is sold the losses can offset the capital gain. I believe that the gain will be treated as ordinary income under the related party rules.

I would start with Pub 544; see page 20 for the related party rules.

Depending on how the real estate market goes, maybe you can find a low point, get an appraisal to support a low fmv and distribute the property to the shareholder. Although if you distribute rather than sell, I'm not sure if you can offset the gain with the suspended losses.

Good luck!

Douglasholbrook (talk|edits) said:

1 September 2008
Distribute 80% of the building to the shareholder. This would create gain of $200K of gain which would be offset by the $200K NOL. Put that 80% in the new LLC. Then (1) Make an S election for the corp, hold the 20% for 10 years, then distribute it to the LLC. Also, you are going to need to know what the shareholders' basis in the C Corp stock to get a complete idea of what the situation is.

Sunny (talk|edits) said:

1 September 2008
Thank you everyone.

With regards to UncleSam's question, the Corp has no accumulated earnings and profit.

KINGFISH (talk|edits) said:

2 September 2008
Douglas ---Assuming the corp (20%) continues to receive only
  rents--wouldn't that disqualify the election for Sub S  ??

Douglasholbrook (talk|edits) said:

3 September 2008
"Douglas ---Assuming the corp (20%) continues to receive only
rents--wouldn't that disqualify the election for Sub S  ??"

King, You're referring to s1375, which only applies if there is E & P, which is not the case here.

Svcanyoncarver (talk|edits) said:

3 September 2008
Does your client wish to continue to hold the property? If so, convert to S-corp, simmer for 10 years and the tax problem goes away.

JR1 (talk|edits) said:

September 3, 2008
Excellent point! Sometimes we forget the obvious!

Sunny (talk|edits) said:

3 September 2008
Yes, they intend to keep the building for many years. The building is being rented to their another business, if that makes any difference.

Thank you all for your comments and help.

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