Real Estate in S-Corp

[Donanita]

Need help before 09 taxes due. Client & spouse have a S-Corp that is a auto repair,resale of autos,& inspection stickers. Called and told me they bought land with a house to rent and bought it throught the S-Corp. Told the client this was a bad as the rental has nothing to do with auto repair and is like mixing apples and oranges. Client said bank advised to put land & home in company for tax deduction. I will have to bring their books up to date next month so can the mortgage payments be a loan. I have already told them the repairs they are doing will have to be capitalized and rent reported on personal. Just need to know how to get the loan and repairs off the books so as not to be reflected on the tax return next yr.

[AuditorTurnedGood]

anyway to quitclaim the property out of the S-Corp and book whatever the S-corp has paid for the land as a loan due from S/H? Might make things easier down the road. I have a client that does this all the time - buys a property in his name and runs all the expenses through his Family limited partnership, or vice versa. Always a mess. Best of luck!

ATG

[Matt Sova]

Never ever ever

That is how often you should put real estate in a corporation. Set up a separate LLC to hold the land and bldg and report the income and expenses of such on a schedule E. Then go to the bank and smack the person upside the head that is giving tax advice.

[DMICPA]

Property in S-Corp

I interviewed a potential client that bought a building and ran it through the auto repair S-Corp business he owned.

I would have not done this but had trouble finding the disadvantages. It is an S-Corp so the rental operations flow through to the shareholders K-1 forms. The tax treatment would be the same as if it was a Schedule E item. Even the sale of the property down line would still have capital gain treatment same as an individual.

For an S-Corp., I did not find big tax disadvantages. For a C-Corp., that might be not a good course of action.

Bob

[BHoffman]

I think the big problem is getting the real estate out of the SCorp without triggering a taxable event to the shareholder when there is no sale. This might happen if the shareholder retires and wants to keep the building and rent it out.

[kthurman]

Step-up in basis

Also consider that upon the Taxpayer's death the real estate inside of an S Corporation will not receive a step-up. Rather, the stock of the S corporation is stepped up. When the real estate is sold, the gain (both capital and the portion of unrecaptured 1250 gain) will flow through to the shareholder as a gain. This gain will increase the basis of the beneficiary's stock, often to more than FMV of the S Corporation itself. Once the S Corporation stock is sold at a loss, it is capital in nature.

Also keep in mind that a distribution of the property is at FMV, as if it had been sold. If AAA is not sufficient, the TP would also have a gain.

[BOB W]

One of the reasons for becoming a Corporation, in general, is to limit personal exposure to certain liabilities. This means that only corporate assets can be held liable. When you put Real Estate in an operating business you just make your creditors VERY happy. You not only lose the business, you also lose the real estate. Separation of assets is the proper planning.

[geekgirldany]

I have a question regarding this. What if the taxpayer is only in the business of buying and renting houses? That is the only thing that the corporation would be used for. Would you advise them to put it in a S-Corp or still recommend a LLC?

The reason I ask is that I have a relative that was building and selling houses (only build three) and then started buying houses to rent. Currently he only rents houses out. He runs it all through a S-Corp. I don't give them tax advice of any kind but asked him why he put it in a S-Corp... he said tax breaks??

[BOB W]

I have a question regarding this. What if the taxpayer is only in the business of buying and renting houses? That is the only thing that the corporation would be used for. Would you advise them to put it in a S-Corp or still recommend a LLC?

The reason I ask is that I have a relative that was building and selling houses (only build three) and then started buying houses to rent. Currently he only rents houses out. He runs it all through a S-Corp. I don't give them tax advice of any kind but asked him why he put it in a S-Corp... he said tax breaks??

Every house should have its own SCorp or LLC. If one has a problem, that is where the problem stays. Currently (all in one corp) all the assets can be used to satisfy any other building's problem. When it comes to building new homes the risk is even greater. Vacant partial construction is where kids & adults can get hurt. Construction waranties and construction problems down the road becomes the corporation's problem with ALL of the assets at risk. Separate corporations for each home keep the problems separate. Purchasing enough Insurance is needed if left in one Corporation.

I don't know of any tax breaks for being an SCorp under this situation.

Yes, it is expensive but losing it all is more costly.

[geekgirldany]

Thanks so much Bob for the explanation. This was something I had always wondered about.