Distributing real-estate in S Corp. - PLEASE HELP!!!

[Hamacher]

I have a client that for some reason has a building in an S Corp. The building has since been fully depreciated. She wants to put the building into an LLC that will be owned my herself and one other person 50/50. I explained to her that she will have to recongnize gain on the transfer ($420,000 FMV). Of course she doesn't want to do this. The other partner is going to cosign on the new loan but does not want to do so, if he is not going to own 50% of the property when its paid off. I suggested that he cosign on the loan and have an agreement that states that she will contribute the real-estate to the LLC in 8 years (when it expected to be paid off), giving him 50% ownership. This will give her 8 years to save for the taxes or they can remortgage the property in 8 years, giving her enough money to pay the tax at that time. Will that work?

Thanks in advance!

[outwest]

How about a spin off..

a new S Corp with the real estate that the two own? Leave the rest of the business assets in the old corp?

Doesn't fix the corporate real estate problem, might consider that rates are as low as likely for some time to come. Maybe take the hit now rather than later.

Late in day, more comments than answers.

[erchess]

Observations

I would echo Outwest's suggestion that you and your client think twice before putting off a major income recognition to a time when most of us think tax rates are likely to be higher.

I don't know whether what you suggest would defer the income in a legal manner but you might wish to pm bees or nyea or one of the other top people on the board. I would appreciate it if they posted their answer here so everyone could learn.

[Hamacher]

I agree

Oh... I agree but unfortunatly that is not an option. She simply does not have the money to pay the tax. I like the idea of the spin off. I guess it would be possible to spin off the S Corp. and make the new owner a shareholder. His outside basis would be zero and would not have to recognize gain until sold. Correct? What type of spin off would this be? I want to make sure that it doesnt go bad.

Thanks again for all the help.

[BOB W]

Be careful of the 21 % or more ownership change..............on the spin-off. It won't work..

[Hamacher]

Any other thoughts?

Be careful of the 21 % or more ownership change..............on the spin-off. It won't work..

Whats your opinion on the note, giving the new guy ownership in 7 or 8 years?

[BOB W]

Whats your opinion on the note, giving the new guy ownership in 7 or 8 years?

I would like to say OK, but I'm not smart enough to say that. Google "Spinoff" and read all that you can about time factors in regards to time period allowed. Intent at the time of the spinoff may be a factor.

[Hamacher]

Anyone else?

Any other thoughts about the note?