S-Corp / Rental Prop & Sale

[bbrownatl]

Just need a quick check on one item. First year client who has an S-Corp which holds four single family properties of which he rents. He sold two this year. He had a regular Corporate job and held these properties for 5+ years. On the prior year return, the preparer had all the income and expense on the face of the Form 1120S. I have it accounted for differently this year. First, I have the rental income/expense on Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation”. Second, I have the property dispositions (Sec. 1231) reported on Form 4797. The return looks weird as nothing flows to the front of the 1120S as the rental income flows directly to the K-1 Box 2 (Rental Real Estate Income) and Box 9 (Net sec. 1231 gain). If I’m off track, please let me know.

Oh, one more item. He didn't pay a salary. Nice huh?

Thanks in advance for your feedback.

[DaveinTexas]

From the 1120S Instructions

To be honest, I've never encountered a client with Rental Property in an S Corp. Normally, this is a bad idea, but if the client Never wants to move this property into his name I suppose the taxation is similar to that of 1040, Schedule E. Well, all except basis limitations I suppose.

As for the salary, I really don't know if the IRS would gripe about this since the underlying activity is "Rentals" and passive by nature. But if he "is" the management company for these properties, it may behoove him to pay a reasonable salary to keep up appearances that he materially participates in this activity. Just my 2 cents.

Anyway, see the Instructions for the 1120S below; this snippet states to list only gains from the sale of assets in a "trade or business" on the first page. Rental activity gains are listed separately on the K-1.

Form 1120S Instructions, Page 14

Line 4. Net Gain (Loss) From Form 4797 Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on line 19 of Form 8825 or line 3 of
Schedule K and box 3 of Schedule K-1, generally as a part of the net income (loss) from the rental activity.

[Burke]

I had one of these for years, holding a shopping center, with two shareholders. Always did the return exactly like you are doing, Form 8825. (There were always profits, never any losses.)