Land in S Corp

[gpat]

Hi all,

Can anyone please tell me why one shouldn't want assets such as land in S Corps?

Thank you in advance.

Greg

[veritas]

Well I guess I would ask why do you want land in an S-Corp?

[Unregistered]

Future distributions

The land can be distributed out of an LLC to a member of the LLC without triggering a taxable event. Distribution of appreciated property out of an S-Corp to a shareholder is a taxable event.

What is the particular situation, and you can get more particular answers.

JoshInNC

[Bees Knees]

A typical situation is when you have a guy with a pole barn next to his house and he decides to start a business out of his pole barn. He wants to write off depreciation and expenses of the pole barn, so he gets the bright idea that he should run the business as an S corporation and have the S corporation pay such expenses.

Not realizing that his bright idea of a business is going to fail within 5 years, he contributes the pole barn and lot it sits on into the S corp. At the time, the lot wasn't worth much, but 5 years later after his business fails, the lot increased in value by $90,000.

The pole barn was a piece of junk to begin with, so not much value there in deducting depreciation, and the electricity used was minimal. The value of the lot is what increased in value during those 5 years. He got zero deduction for the lot because you can't depreciate land.

Now when he comes to you and says he wants to liquidate his failed S corp, you inform him that he now has to pay capital gains tax on the $90,000 increase in value of the land.

He says, what for?

You say because he put the lot into the corporation and now he wants to take it back out.

He says, but I don't want to sell the lot...I just want to liquidate the corporation.

You say, sorry, those are the rules.

He says, why didn't you tell me this 5 years ago before I started the corporation?

You say, I don't know...I guess I never thought about that.

Two days later you get served by his lawyer for malpractice.

[Unregistered]

Great job Bees!

Which is why you advise him to set up an LLC, and put the land in the LLC, from which he leases the building for the "pole barn".

What exactly is pole barn, Bees?

JoshInNC

[veritas]

It's good enough to be in THE TAXBOOK

[John of PA]

Land in S Corp

Also if you use an S Corp, the owner must be on a payroll with taxes withheld. With an LLC, there's no payroll paperwork.

[Bees Knees]

What exactly is pole barn, Bees?

In Minnesota, it is a barn constructed by sinking huge poles into the ground, and then putting some kind of frame work and siding around the poles. As opposed to constructing a building on top of a concrete slab or foundation.

This web site has a picture of some pole barns.

http://www.84lumber.com/Projects/pole_barns.asp