Category:RE in a Corp

From TaxAlmanac

Intro

Real estate should not be held in a corporation (S or C). "RE is an appreciating asset. So if/when you want to get the RE out of the corporation, it is a taxable event with negative tax consequences." "You will retain greater flexibility by holding the RE outside a corp." (quotes from Jdugancpa)

“Holding RE inside an S corp is NOT AS BAD as holding it in a C corp, but it IS NOT AS GOOD as NOT holding it in an S corp. If you are trying to get liability protection an LLC will provide that without resulting in the bad things that can happen (not necessarily will happen) by holding it in an S corp.” (also Jdugancpa) And keep in mind that RE held in an S corp will be RE held in a C corp if the S election is ever inadvertently blown.

This discussion covers many of the specific reasons why real estate should not be held in a corporation, including both the classic double taxation issue in a C corporation and also a variety of the problems that arise in S corporations as well.

There is one caveat; here is Jdugancpa again: "BTW, foreign ownership is one of the few good reasons to intentionally own RE inside a C corp."

Reasons why RE should not be held in a corporation (S or C)

• Owners' basis. “Mortgage debt is incurred in a partnership will add to the outside basis for the partner's interest but this is not true with an S corp.” and “Partners who are responsible for the debt have basis for it, inside. Corp owners only to the extent of their investment, their own loans to the corp, and undistributed profits.”

• Trapped suspended losses. More from Jdugan: “When you have multiple rentals in an S corp, which are generating losses that won't flow thru to the 1040 due to the 25k limitation, and you sell one, figuring, ah, that'll release the suspended losses...WRONGO JACKO! You have to sell ALL the S corps' rentals to use the suspended losses.” Similarly, JR1: "you cannot use losses, even on selling one of them, since they're inside the S you'd have to clear out all of them to release any suspended losses. Other than the 25k passive loss limit, I mean. If they're not in a corp, when you sell one, it releases the loss so that you can take them. Inside, can't do."

• Step-up in basis. The heirs "got a step up in basis in the stock of the corporation, but the corporation did not get a step up in its assets.” "The S corp uses its original basis (adjusted for depreciation taken) in the property to calculate [its] gain." (quotes from Kevinh5) Dennis notes one particular situation where this can work out okay: “One property in an S is not that big a problem. Basis step up on death plus basis addition from gain recognition on the first sale gives you a lot of leeway. You can even remortgage and take money out.” More from Dennis: "Works fine in S Corp because gain on distribution is offset by stepped up basis plus basis added by gain recognition. For C Corp gain on distribution costs bucks."

• If RE and corp ever need to be separated. You "can't get it out when company is sold, which often happens, or when they move, etc. To get it out, it's a deemed sale at FMV with gain recognition....You're paying tax for no reason.” (quote from JR1) And from KatieJ: “In an S corp it's fine if the property is sold, but if the clients later want to get it or its value out in some other way, a taxable event may result.” Jdugan reiterates, with another good example, "f you want the RE out of the S corp without a sale (e.g. gifting to children), the RE comes out of the corp at FMV and gain is recognized."

• Double taxation on C corps. This is an issue specific to C corporations. The corporation will pay tax on any gain when the RE is finally sold, and then if the proceeds of the sale are divended out to the shareholders, they will pay tax again. “As an example, if building has basis of 16K, FMV of 100K and mortgage of 39K, the taxable gain is 84K. Then, when the asset is distributed out, with the mortgage I presume, the dividend will be 61K (100K less the mortgage). perfect reason why C Corps should never hold property.” (quote from Southparkcpa)

How to get RE out of the corp

Here's a decent run-through of some of the options: Discussion:Moving Property out of a C Corp. Also see Discussion:Susanrid_-_Consider_Corporate_Reorg, Discussion:C-Corp owning real property again, Discussion:S corporation real estate distribution, Discussion:C Corp R/E distribution, and some of the other discussions listed at the end of this page.

Real-life examples of the problems that can occur

See Discussion:S Corp Election Botched Big time, Discussion:S-Corporation Tax Planning Issues. Others are mentioned in some of the discussions listed at the end of this page. For a humorous note, see how getting RE out of a corp is like pumping out septic tanks, see: Discussion:Are_S_corp_built-in_gains_really_that_big_of_a_deal?.

Discussions categorized as including posts about RE in a corp (alpha order)