Discussion:Transfer real estate out of S corp
From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.
From TaxAlmanac
Discussion Forum Index --> Basic Tax Questions --> Transfer real estate out of S corp
Discussion Forum Index --> Tax Questions --> Transfer real estate out of S corp
| 30 September 2009 | |
| I inherited a client with the business real estate in the S corp. He and I have discussed the issues and now since the real estate prices in NJ have dropped significantly, I am thinking about transferring the real estate to a SMLLC. The property is worth less than $500K and at one time was probably worth more than $750K. If we transfer it out, he would have to pay tax of about $40,000 due to the pass thru gain, but he would get the step up in basis (correct?) and the future appreciation will be out of the S corp. He is a relatively young guy in a dying business (Auto Body) and I am looking for thoughts on biting the bullet and paying the tax, but doing it on our own terms and not waiting until he sells or closes the business or until the prices start to rise again.
Thanks for any advice and thoughts. | |
| 30 September 2009 | |
| I might be wrong but a corporation is allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. 311). | |
| 30 September 2009 | |
| There is no tax loss. There would be a gain if and when this property was sold or distributed. The S corp's basis in the property is about $250K. | |
| 30 September 2009 | |
| I would document the discussion as well as the projected tax cost of doing so (don't forget to take into account AMT and state tax). This could be a very valuable tax planning idea to save your client gobs of money later if capital gains rates go up. | |
| 30 September 2009 | |
| Also note that the depreciation recapture of sec 1250 assets will trigger ordinary income. | |
| 30 September 2009 | |
| I am not too concerned with the recapture (I think it will be minimal, but thanks for the heads up). I will address the AMT. Unfortunately, I do not do this guy's 1040. His wife's uncle is a retired (and very opinionated) CPA who does the return by hand. He won't give it up either. Do you know how hard it is to do tax planning for this guy? :)
But thanks for the replies...I think I will start to move forward with some serious numbers and see where we end up. It makes sense to me because in the long run, he will get a step up in basis and ultimately a depreciation write off at ordinary income tax rates, so I think I can show him how he will end up "getting the tax back" so to speak and how long it will take him to do so. | |
Laketahoecpa (talk|edits) said: | 30 September 2009 |
| Just to be clear, sec 1250 doesn't trigger ordinary income - sec 1250 recapture is taxed at higher capital gain rate of 25%. Is still considered capital gain, though. | |
| 30 September 2009 | |
| Laketahoecpa, good point, I agree, with assumption that the property was using MACRS SL depr method and it was an S corp over 3 years. | |
To join in on this discussion, you must first
log in.
