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Discussion:S Corp. distribution of Real Estate
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Discussion Forum Index --> Advanced Tax Questions --> S Corp. distribution of Real Estate
Discussion Forum Index --> Tax Questions --> S Corp. distribution of Real Estate
Ss-cpa (talk|edits) said:
| 9 November 2009
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| I have an S Corporation client that purchased an office condo before I had a chance to advise them to set up an LLC instead for this property. This purchase was made in 2000 and significant depreciation has been taken on it. With the poor commercial real estate market, the thought occurred to me that the S Corporation could obtain an appraisal of the property, and if it was low enough, the S Corp. could distribute the property and contribute it to a new single member owned LLC that he would set up this year. At the end of the day, one person would own 100% of the S Corp. and 100% of the LLC that would own the office condo. I know that the S Corp. could not take a loss on the distribution, but if the gain is not too much, it may be worth while to do this. I know that any gain will be taxed at the 25% rate for recapture. Does anyone recognize something that I am overlooking or know why this would not be a good idea?
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JR1 (talk|edits) said:
| November 9, 2009
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| Been discussed several times, it's a great opportunity if the numbers come in right.
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Ss-cpa (talk|edits) said:
| 9 November 2009
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| Sorry, I will be more careful to review previous discussions before submitting a question.
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JR1 (talk|edits) said:
| November 9, 2009
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| Didn't mean it that way...just that you're not the first one to think of that lately! Don't confuse me with the Search Officer. Ahem!
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Harry Boscoe (talk|edits) said:
| 10 November 2009
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| Recommended reading in this situation would include Internal Revenue Code Section 1239.
What "recapture" are you referring to?
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Ss-cpa (talk|edits) said:
| 10 November 2009
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| I misunderstood how the rules work here. 1250 recapture would not apply here since there is no excess depreciation over straight line. The gain would be 1231, with an adjustment for 291, except for 1239 as I understand it. This means that all gain will be ordinary including depreciation recapture and any exceeding the purchase price plus improvements from my take on the rules. Is my understanding correct so far? I was looking at the 2009 Form 4797 to see how the 1239 would impact the reporting of the distribution. I am assuming that the distribution would be reported in Part III and all the gain would be reported somewhere under line 26 - the section 1250 section, but I am not sure. The only other place would be to report the entire distribution as a sale in Part II. Does anyone know?
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Harry Boscoe (talk|edits) said:
| 10 November 2009
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| You may also wanna check out IRC Section 1363(b), especially (b)(4).
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Harry Boscoe (talk|edits) said:
| 10 November 2009
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| And then, after the distribution, won't the S corp have to pay rent to the LLC for using the office condo? If so, there's the passive loss rules you're gonna hafta deal with. Especially the one that says for renting to a related party any net loss is a passive loss (bad), but any net income is *non*-passive income (also bad). Better check on how much the Fair Market Rental will be and whether or not the net rental loss of the LLC might get suspended because of the passive loss rules.
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Ss-cpa (talk|edits) said:
| 10 November 2009
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| Whoops! I mis-read something that said that 291 applies to all corporations, including small corporations. I took that to mean S Corps as well. Even if 1239 did not apply, 291 would not apply here since the corporation was an S since inception. Regarding reporting, I am now inclined to think Part II on the 4797 for reporting as Part III does not have the appropriate line and Part II allows for the entire transaction to be ordinary. If someone disagrees, please chime in.
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Harry Boscoe (talk|edits) said:
| 10 November 2009
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| "...please chime in."
Chiming *out*.
Harry. Refrigpbrerator.
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