Discussion:Rental property inside s-corp

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Discussion Forum Index --> Advanced Tax Questions --> Rental property inside s-corp

Discussion Forum Index --> Tax Questions --> Rental property inside s-corp

Bchcpas (talk|edits) said:

30 November 2009

Are losses from rental activity of a s-corp limited to basis in s-corp?

If so, is this a reason not to put rental property in an s-corp?

Example: Rental activity in s-corp loss for year is 15000. Shareholder Basis at begining of year is 5000. Shareholder gets to deduct only 10000 on 1040?

Same activity not in s-corp. 15000 is deducted on 1040. Basis is not an issue? (assume in both situations that taxpayer meets conditions to deduct up to 25000 of rental losses)

Looks like a real drawback to rental properties in an S-corp.

What IRS publications would help to understand this?

DaveFogel (talk|edits) said:

30 November 2009
I agree that it's a bad idea to put rental property into an S corporation if the rental activity is going to be generating losses that the shareholder can't deduct due to the IRC §1366(d) limitation on the shareholder's basis of stock and debt.

In your example where the shareholder's share of the S corp. loss for the year is $15,000 and the shareholder's basis is $5,000, the shareholder gets to deduct $5,000 (basis limitation), not $10,000.

If the property were not in an S corp, then the full $15,000 loss would be deductible assuming that the requirements of IRC §469(i) (the $25,000 rental loss allowance) are met.

The instructions to Form 1120S, Schedule K-1 discuss the limitation on the deductibility of S corp losses (IRC §1366(d)). Here is the link: http://www.irs.gov/pub/irs-pdf/i1120ssk.pdf. Publication 925 discusses passive activities, Publication 542 discusses corporations in general, and the instructions to Form 1120S (http://www.irs.gov/instructions/i1120s/index.html) may also be helpful.

Bchcpas (talk|edits) said:

30 November 2009
thanks dave

I was just looking at the at-risk rules. I've got a feeling that, in a situation were shareholder basis would be limiting, the same rental property outside the corp (ie 1040 sch e)would have losses not allowed due to at-risk limitations.

I'm going to run an example both inside and outside a corp. I can share my conclusion if anyone is interested.

Does a loss that otherwise qualifies for the $25000 loss allowance need to first pass the at risk test?

DaveFogel (talk|edits) said:

30 November 2009
What part of the at-risk rules concerns you?

Southparkcpa (talk|edits) said:

30 November 2009
At risk in most instances comes into play in most cases by looking at the personal guaranty portion of the debt. For example, in this situation, I am sure you will find he is at risk (i.e., personally liable) he may NOT be but that is rare in small companies.

He could have basis but NOT be at risk and visa versa.

KathiJud (talk|edits) said:

1 December 2009
There are big differences when there is a mortgage on the rental property. Your S Corp shareholder can only deduct losses to the extent of their basis in stock and/or basis in their own loans to the company. Even a personal guarantee of the mortgage does not give basis to the shareholder.

The sole proprietor or partner can however get basis from the mortgage loan.

IDrinkYour Milkshake (talk|edits) said:

1 December 2009
Who needs an analysis/comparison? Never put RE in a Corp (S or C). Not only will you have basis issues, but you could also potentially have step-up issues later on as well. The $25K passive limitation with active participation will apply unless the shareholder is a RE pro (single activity election may be required if there are other RE activities).

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