Discussion:Getting appreciated real estate from an S-Corp
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Discussion Forum Index --> Tax Questions --> Getting appreciated real estate from an S-Corp
| 28 December 2007 | |
| I'm looking for strategies that might be employed to get low-basis real estate (in this case, farm land) that has substantially appreciated over the years, out of an S-corp. There are 5 20% shareholders, and only one or two want cash out.
I realize that some land could be sold by the corp, and the shares of stock could be sold by the shareholder, back to the corporation, and that there tax consequences to this. Alternately, I realize that the corporation could be liquidated, so that each shareholder could then have an undivided interest in their own land, and there are certainly tax consequences to this as well. At this point it appears (after running the numbers) that the liquidation is the lowest tax bite per shareholder. Is anyone aware of other strategies that would result in tax advantages? | |
| 29 December 2007 | |
| I am shooting from the hip here. But what about setting up another entity and have the S-Corp sell the land on an installment basis to this entity. Then liquidate the corporation by distributing the installment note to the various shareholders. I seem to remember that the tax on the liquidation of installment note can be delayed (but maybe this only applies to C-Corps?). If you can get this far without any tax, then I think you can figure it out from here.
Also, don't forget about establishing a business purpose for all of this. | |
| 29 December 2007 | |
| Thanks PVVCPA. This is interesting. You would liquidate the new corporation? (if you liquidate the old one, the new corp still owns the land... same problem.) I guess I'm not familiar with the concept of distribution of an installment note? How does that get carried out in the real world, reported, or shown on the returns, how would it affect basis etc.
Also, since the tax on the installment loan is only delayed, how does that reduce or eliminate any tax? | |
| 29 December 2007 | |
| Obviously, you wouldn't set up the new entity as another corporation. Most likely an LLC or a GP. Depends on what the remaining owners are gonna do with this land.
Step #1 is to figure out if you can distribute an installment note out of an S-Corp without accelerating the gain recognition. The truth is out there. | |
| 29 December 2007 | |
| Wait a minute! Back up. Can't the remaining shareholders just buy out the stock of the one or two that want to cash out? Why do you need to move the land out? | |
| 29 December 2007 | |
| Well, it would cost $500,000 for the shareholders to buy out the asset, and they don't have the cash, neither does the corp. A loan also is out of the question as the return on investment on farmland is pretty low, under 5% before taxes. | |
Southparkcpa (talk|edits) said: | 29 December 2007 |
| Greg
You have a very difficult situation which may have NO real answer, You may wish to consider sitting the 5 shareholders down, explaining that Cap Gain rates are at historic lows and a sale before 11/08 will certainly be taxed at a lower rate. (i.e cap gains rates are in trouble). | |
| 29 December 2007 | |
| Greg, you stated that only one or two shareholders want to cash out. But what do the others want to do? If the others are gonna be forced to cash out because of this, then this whole discussion is moot. | |
| 29 December 2007 | |
| I agree with SP, are you ever going to find a better time to sell going forward? And farmland at present is probably not tainted by the housing slump, especially if you can grow corn (ethanol) on it, so the realized price should be good. I imagine with the national debt run up as it is, taxes are headed north, if anything. Are they operating an actual farm on it now, or is it somehow being used in business? If they need to generate more cash to make these people happy, and don't want to sell, maybe they could meet with the county extension agent to see if they can get a non-smokable (lol) cash crop going (or lease the land out to a large outfit). Also, as far as the investment return on farmland, that 5% number may be outdated. I mean, we are in a big inflation with agri. products right now, something to think about. One problem we could be facing going forward might be the labor to get the crop out of the field. | |
| 29 December 2007 | |
| Thanks for all your responses. The 5% ROI is accurate currently, perhaps a little high. Farmland prices are at an all-time high. But so are crop prices and cash rents. The farm is currently run as a business.
Assume for the exercise that only two shareholders want cash out, so that it's not a forced liquidating distribution. The other three shareholders will either continue operating the corp, or if a liquidation IS done for tax purposes, they want to hold on to their land because they desire to-- it's been in the family for 125 years and they don't need the money. The only two scenarios I have seen so far are-- 1) If land is sold to generate cash, there is a capital gain spread to all shareholders, and the cash is used to buy out the stock of the two shareholders. The remaining shareholders use the cash to buy out the stock of the two people leaving. Then I assume some sort of adjustment is made cash-wise between the two groups to cover the CG taxes that the land sale creates. 2) If the corp is liquidated, that generates a more complicated situation where the corp takes a deduction based on the loss on the distribution of the asset. I'm being brief here, just mentioning it to bring everyone up to speed. But after the liquidation, everyone has their own land and can sell it or keep it or whatever. The liquidation would bring the basis of the land up so there would be no further CG tax. | |
| December 29, 2007 | |
| You'll need cash either way. If you liquidate the corp, it's a deemed sale of the land at FMV, so tax gets paid. Where's the cash come from? (for the three who don't want to sell?) If you buy out the two who don't want to play, you need cash. From where? A refi is in the offing here, fairly clearly. It seems to me that the business choice is made first, do the remaining three want all the land still? If so, is there any compelling reason to keep the corp? Then drive from there. | |
| 29 December 2007 | |
| JR, Isn't it clear? They will liquidate the corp distributing out the land. Thus the two shareholders can get their cash while the other three continue to farm the land. | |
| December 29, 2007 | |
| Are you saying that you distribute the land at basis instead of fmv? | |
| December 29, 2007 | |
| No, the land will be distributed and everyone pays tax at FMV. Then the three shareholders will continue to farm the land because they do not want to sell it. And the other two will get their cash because the land has been sold but not really. | |
| 29 December 2007 | |
| We do need cash either way. If the corp is liquidated, it is taxed as a sale at FMV. Some land (maybe 10% as an illustration) would need to be sold in order to pay the tax on the liquidation. Then of course the sale of the land generates MORE tax. This is a complicated scenario with several other factors involved.
In that scenario the shareholders desiring to sell their land then own their own land at increased basis and may sell it. A refi, as I have said is out of the question, for two reasons. The shareholders that don't need cash do not want their shares encumbered by any loans. Additionally, there is not enough profit in farming to pay even the interest on the loan, much less the principal. So, I'm still hoping to find some other angle on all this. The only one I've come up with is some kind of installment sale. | |
| December 29, 2007 | |
| Maybe chat with a tax attorney who works farmers a bit in your area for some other creative ideas. I like keeping it simple, but if you can find a way to delay some tax you do what you have to do. | |
| 29 December 2007 | |
| Shareholders can sell stock via installment sale, see Notice 2000-26 | |
