Quote Originally Posted by Roland Slugg View Post
Hello PPJ. I read your post and wanted to respond but became uncertain about some of the basics. I therefore made the following assumptions:

1. The Corp owned (and still owns) the business but did not own the real estate.
2. The parents gave the shares of the Corp to their son (and his wife).
3. The parents sold the real estate to their son, taking a note for some or all of the selling price.

I'll offer answers to your questions, based on my understanding of the facts as stated above.
The above assumptions are correct.

Quote Originally Posted by Roland Slugg View Post
By "business" I assume you are referring to the Corporation. It is almost always inadvisable for real estate to be owned by a corporation, including one that has elected S Corp tax status. If the S Corp election is terminated, either voluntarily or inadvertently, the real estate can become locked-in, resulting in very undesirable tax consequences.

Whether or not the real estate needs to be held in an LLC is a matter for your client to decide. Lawyers seem to love LLCs, but in many cases I believe they are completely unnecessary. LLC's offer little financial liability protection, and lawsuit liability protection can and should be obtained by carrying adequate insurance.
Thank you, Roland Slugg. Per my research in this matter, your opinion above seems to be the consensus.

Quote Originally Posted by Roland Slugg View Post
Absolutely not! If the Corp doesn't own the real estate and isn't liable for the debt, how can the property and related loan be treated as an asset and liability of the Corp?

The loan isn't the Corp's debt, so why is it making the payments? You should advise your client to stop that practice immediately ... and retroactively to day one.

The Corp should instead be paying fair market rent to your client (also retroactively), and your client, in turn should be making the note payments.

I also suggest a "triple net lease" in which the tenent, i.e. the Corp, pays: (1) the real estate taxes, (2) the hazard and liability insurance and (3) all minor, ordinary repairs and maintenance (but not major repairs or improvements, such as a new roof). This would help avoid a loss from the rental activity, or at least it will serve to minimize it.
This is what I expected the answer to be. I appreciate the time you took to explain further.

Quote Originally Posted by Roland Slugg View Post
You are correct. Get an appraisal, as you suggested. The shares' overall FMV might be subject to a "valuation adjustment" due to their closely-held nature. You didn't indicate an approximate value of the business and, therefore, of the Corp's shares, but there is an easy way to transfer $112,000 based closely on the facts you gave, without any of that amount eating into the parents' lifetime gift and estate tax exemption. Each parent can give each donee ... i.e. the son and his wife ... $14,000 per year. So they gift half the Corp's shares on 12/31/2015 and the other half on 1/01/2016. That's two donors and two donees and two tax years, or $14,000 x2 x2 x2 ... $112,000.
Thank you, Roland. I did not think of the gift splitting on 12/31/15 and then doing it again on 01/01/2016.

Quote Originally Posted by Roland Slugg View Post
You understand, I trust, that for income tax purposes the parents' basis in their shares of the Corp become the son's (and his wife's) basis. The new owners also need to make the S Corp election.
I did not know the son and his wife need to make the S Corp election as well. I am past the late election filing due date. Any advice on how I proceed with this?