Purchase Of Property

[geekgirldany]

New client that owns a used car lot. He purchased one building that he is currently in. I'm not sure of the facts on it yet. He then purchased another property with a house on it. He is going to eventually use it as a used carlot. Until that time he wants to lease out the house. To add into this he purchased it under his name. But he also has an investor who fronted some money on it. Now he said that he borrowed against stock to get the money and got the money from this guy. No Bank involved. So I assume the payments are to this guy and back into the stock. The rent/lease payment he will receive will be less than his monthly payment to pay on the property.

I'm not sure how this works about borrowing against stock. This needs to be repaid, correct? Also he is wanting to make these payments out of his used carlot account which is incorporated S-Corp. The S-Corp doesn't own the property. Its in his name. So shouldn't the S-Corp pay him rent for the property when it starts using it? Until then he could only do a distribution to himself to pay for the property. He then mentioned about transferring into the S-Corp.

Any suggestions? This is for 2006 doesn't affect 2005... thankfully.

[jainen]

Someone else can answer

It must not be much of a house--the banks won't touch it and even the hard-money lenders want something more backing the loan. I guess that's to be expected, since nobody loans money on a house you know is going to be destroyed. Anyway, nothing has happened to the stock yet except that it is pledged as collateral. If he defaults on the loan he will lose the stock. As additional security, the lender made sure the car dealer was personally liable for the loan instead of hiding behind a corporate shield.

Meanwhile, he can trace interest payments (but not payments on principal) as an expense to the rental and later to the car lot. The tracing rules apply even if the loan is not secured by the property.

Someone else can answer about how the property should be titled. It seems to me that right now it is a rental and not part of the car business. Later he can transfer it to the corporation, although both the property and himself personally would still be subject to the mortgage liens.

[geekgirldany]

Thanks so much for the information. That helps to know about the stock.

The house was in the process of being purchased but for whatever reason the sell didn't go through. My customer had told the seller that if the sale did not go through he would pay him cash the day it did not go through. So I think that may be the reason he got the money that way. The house is extremely nice and he talks like it will be used as a office for the carlot eventually. Has a good bit of land with it too.

I just feel like it doesn't need to be in the carlot corporation until it is actually being used for that purpose.

[Bees Knees]

NO, NO, NO…Under NO circumstance let him transfer the real estate into the corporation.

Allowing a client to transfer real estate into a corporation is malpractice. If you don’t want to be sued, don’t even think of it as an option.

The correct way to handle it is the real estate should always be owned by the individual shareholder. The individual then leases the real estate to the corporation. That way, you can pull corporate profits out of the company without having to pay FICA tax on wages. The shareholder is also free to liquidate the corporation without causing the appreciation on the real estate to be taxed.

[Matt Sova]

Agree with Bees

Do NOT put the real estate into the corp. Do it just as Bees said.

[jainen]

Agree with Bees

Good thing I decided to let someone else answer that part of the question.

[geekgirldany]

Thank You!

Thank you guys so so much. I knew there was something there about putting it in a corporation. It didn't sound right but I wasn't sure. I'll tell him exactly what you told me.

Thank you again!

[geekgirldany]

One more thing,

"The shareholder is also free to liquidate the corporation without causing the appreciation on the real estate to be taxed."

What does this mean "appreciation on the real estate to be taxed"? I know that appreciation means to go up in value.

EDIT:
I think I found this on Google

http://groups.google.com/group/misc.taxes.moderated/browse_frm/thread/4c5651baae9aafd2/289635c501e3d3a3?tvc=1&q=appreciation+of+real+estate+s+corporation&hl=en#289635c501e3d3a3

"It's basically a problem of how to get the real estate out
of the corporation without selling it. Even with an S
corporation, gain would be recognized on the distribution of
property. And with a C corporation there is no special rate
for capital gains, and double tax on the distribution. And
who's to say that S corporation rules might change to your
detriment at some future date. With an LLC no gain or loss
is generally recognized when property is distributed"