Discussion:Closely held business nearing retirement stage...

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Discussion Forum Index --> Tax Questions --> Closely held business nearing retirement stage...

KSCPA (talk|edits) said:

18 April 2006
Taxpayer has two corps, one 'S' and one 'C'. Both corps are made up of commercial and residental rentals. Taxpayer wants to begin selling off properties, investing proceeds and living off the investments. Estimated total market price, pre tax, of all properties is around 4 million.

Assuming taxpayer does what he plans, sells off all properties, invests proceeds, what are the tax ramifications of the corps paying some kind of salary to the owners based on the earnings of the investments? Taxpayer wants to eventually liquidate both corps.

Any ideas on the best way to do this?

WillyB (talk|edits) said:

18 April 2006
Beware of excess passive income for the S corporation (need to zero any AE & P), and the personal holding company rules for the C corp.

Dennis (talk|edits) said:

18 April 2006
I'd look at converting the C to an S. The 15% rate on dividends may not stay forever and the real estate could be just as good an investment as anything else. Retirement can be a long time -- what's ten years?

Jdugancpa (talk|edits) said:

19 April 2006
I agree with Dennis that electing S status and waiting 10 years to liquidate the properties is a good idea. However, there are pitfalls that you need to be wary of. Electing S status in this situation will cause a problem with tax on excessive passive activity income if the corporation has any AE&P as WillyB pointed out. And if passive activity income is greater than 25% of total income for three consecutive years the S election will be involuntarily terminated. The solution is to pay out dividends sufficient to drain AE&P before the S election is made.

Mtmckeecpa (talk|edits) said:

19 April 2006

If the S corp has always been an S Corp and client wants to sell the real estate, I would pass the gain and the cash right on through and not pay any salary.

C corp is a different matter, maybe a 1031 into a TIC (tenants in common)that might provide more stable cash flow...if he liquidates the S corp he gets some of his $$ out of RE and diversifies that way. Doing a 1031 still doesn't get the unrealized gain out, however. Maybe an installment sale with owner financing?

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