Discussion:Transfer SCorp-Developed Real Estate to LLC
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Discussion Forum Index --> Tax Questions --> Transfer SCorp-Developed Real Estate to LLC
| 21 October 2008 | |
| Hello,
I have a single-shareholder corporation that was created for the sole-purpose of building a 3-flat building for sale. I did the original return in 2006 and elected S-Corp (thinking this would be better than "c") since the taxpayer was already incorporated. The building is now completed and to no surprise - has not sold. The shareholder has no choice but to rent the property. The construction loan will be refinanced to a mortgage and the attorney is suggesting transferring the property to an LLC. The cost to build (including accured interest)is apx. $650K. The projected FMV was $900K but is obviously lower due to current market conditions. I don't know the official "appraised" value, but I'm sure it exceeds $650. I'm reluctant to have the taxpayer make the change because of the potential value of the property and it's tax consequence on the shareholder. I'm wondering if anyone has had a similar sitution? | |
| October 21, 2008 | |
| I don't have a similar situation, but can share thoughts anyway. Thinking out loud, yeah, even with a couple bonafide appraisals in hand, which you must have, there'll be tax to pay unless it comes in at 650k. And it might! Obviously, if it's close, pull the plug and move it out of the corp. If it's much higher, then what? To hold it for rent merely delays the problem, the market will recover, and then one day, OUCH! It'll be worse. Further, was this a C corp before with retained earnings? Depending on what else happens in the corp, you could have passive income problems in even keeping the S. Get the first appraisal so you know what you might be dealing with, present the issues to the client and go from there. | |
| 21 October 2008 | |
| What's wrong with trying to sell the building in the S corp? I don't see why he would need to transfer it to an LLC. Yeah, LLC is generally better for holding real estate (3rd party loans provide basis and distribution of the property are at basis) but I don't think it's such a big deal here that it's in an S corp. Especially, if the intent is to sell. | |
| October 21, 2008 | |
| Good point JB. As long as he still plans to sell it asap, it won't matter since all the gain will flow through. I guess I just come from the 'stuff happens' school, so 10-15 years from now, he's still got the rental in the corp. and now wants to sell the rest of the biz but keep the RE, etc....and you've got problems. But you are absolutely correct if he's still figuring on moving it. | |
| 21 October 2008 | |
| There are no retained earnings ...no activity at all until the land acquisition. As far as the appraisals, this also could be a problem since the company wants to refinance the construction loan. They will need a high appraisal the way the banks are now. The shareholder also has another S-corp that is involved in carpentry construction. He could bring some of the carpentry work into the "rental" corp so that all of the income is not passive. | |
| October 21, 2008 | |
| The passive income isn't an issue as long as there are no C corp earnings left behind. So just keep it as is and have him sell it when he can. | |
| 21 October 2008 | |
| Thanks jbcpa & JR1 - I'm going to suggest keeping the property where it is. | |
Douglasholbrook (talk|edits) said: | 22 October 2008 |
| I would say that the attorney suggesting this either doesnt understand the fact pattern of this situation or doesnt understand tax law very well. | |
