Getting close to having to file those last returns...

[JG EA]

I put off this return until it just can't be put off any longer. Here is a really hard problem for me to think through. I always ask questions each year about this return because of NOL's and NOL carryovers. Now I am asking a different question.

Individual return. Client owns a building "rented" to S-Corp. Client is sole shareholder in the S-Corp. I do not do the S-Corp return.

The corp never has paid the client rent for use of the building, but intends to do so when there is more income than losses coming from it. When I first got the return, this building was on a schedule E with depreciation, taxes, etc. I continued it. My reasoning was that the client planned to sell the property and would have to sell it as business property so it would all be accounted for then.

But now I'm unsure if it should continue as rental property and still take all that depreciation. But it is still used by the S-Corp and so is still business property. I'm going around in circles.

Any thoughts?

Thanks,

JG

[Jiggers]

S-Corp Rental of Building

Does the shareholder have enough basis to deduct the losses that are passed through from the S-Corporation?

The shareholder should still collect rent from the corporation, and then loan it back to the corporation. This creates basis, and the deduction would be passed through to the shareholder on the K-1.

The shareholder should report the rent income. While this may be a wash on the tax return, it is the proper thing to do and avoids the audit on the Schedule E.

Otherwise, don't allow the deduction for depreciation, etc. on Schedule E with no income.

[sea-tax]

I put off this return until it just can't be put off any longer. Here is a really hard problem for me to think through. I always ask questions each year about this return because of NOL's and NOL carryovers. Now I am asking a different question.

Individual return. Client owns a building "rented" to S-Corp. Client is sole shareholder in the S-Corp. I do not do the S-Corp return.

The corp never has paid the client rent for use of the building, but intends to do so when there is more income than losses coming from it. When I first got the return, this building was on a schedule E with depreciation, taxes, etc. I continued it. My reasoning was that the client planned to sell the property and would have to sell it as business property so it would all be accounted for then.

But now I'm unsure if it should continue as rental property and still take all that depreciation. But it is still used by the S-Corp and so is still business property. I'm going around in circles.

Any thoughts?

Thanks,

JG

Well JG I don't think you have a rental and therefore should not be filing a Sch E .
Is there a lease agreement between the S-corp and the Owner of the building? If no then no rental. You need the owner of the building to begin to either collect rent from the S-corp or do away with this facad of having a rental when one doesn't really exist.

As far as I can tell there is no requirement that the owner of the building must rent it out. If he wants to let his s-corp use it rent free then fine but no deductions personally.

Anyhow good luck that is the way I see it.

[JG EA]

Thanks

Thanks for the advice.

Jiggers: Yes there is sufficient basis to deduct losses. But it really doesn't matter since there are heavy NOL's carrying. And if there wasn't enough basis I would be happy to hold the basis instead of having more NOL's.

I agree that the shareholder should collect rent. But, that isn't the case. Doesn't it all come out in the wash since this is business property. (But only when sells.)

And if I stop the Schedule E does it make it anything but business property since the S-Corp is using the building?

The point you make about audit is a point to consider. Doing this the right way is important, but the smart way is also important.

Sea-tax: If it is not a rental and I stop all depreciation do you think there will be any allowed or allowable issues with depreciation when/if the property sells?

Now the corporation is paying the property taxes based on a percentage of the bill. Since the owner (individual) of the property should be paying property taxes, is there any way this could be considered rent?

Thanks again.
JG

[sea-tax]

Thanks for the advice.

Jiggers: Yes there is sufficient basis to deduct losses. But it really doesn't matter since there are heavy NOL's carrying. And if there wasn't enough basis I would be happy to hold the basis instead of having more NOL's.

I agree that the shareholder should collect rent. But, that isn't the case. Doesn't it all come out in the wash since this is business property. (But only when sells.)

And if I stop the Schedule E does it make it anything but business property since the S-Corp is using the building?

The point you make about audit is a point to consider. Doing this the right way is important, but the smart way is also important.

Sea-tax: If it is not a rental and I stop all depreciation do you think there will be any allowed or allowable issues with depreciation when/if the property sells?

Now the corporation is paying the property taxes based on a percentage of the bill. Since the owner (individual) of the property should be paying property taxes, is there any way this could be considered rent?

Thanks again.
JG

Maybe what he has is an investment property and not a rental? With no rental agreement then in effect he is holding a piece of property that is investment. Therefore no depreciation because the property was not placed into service as a rental. I do not think there is any rule that says if you own property you must rent it out.
I would probably lean toward Capitalizing any interest and property taxes and waiting until he actually has rental income.