real estate in a corporation

[sdtaxman]

I have an attorney suggesting to a client to form a corporation that holds farmland and then he can gift shares in the real estate today as well as at death the shares will recieve a step up in basis before they pass to the hiers. I have always been reluctant to put real estate into a corporation because of built in gains. ANy thoughts, I think there has to be a better way to transfer than to tie the land into a corp. THank you

[jainen]

taxable at FMV

If the property is owned by a corporation, there is no step-up in basis when a shareholder dies. There also is no gift exclusion, so any later transfer out of the corporation would be fully taxable at FMV.

[BOB W]

Corporation???

If RE was to be put into a Corporation, which I never do, I would make it an SCorp. The better choice is an LLC taxed as a Partnership. You may want to look at using an FLP. In any case, share or member gifting needs to be within the $11,000 per person per year limits or a gift tax return needs to be filed. A valuation needs to be done on each gifting date for it to hold water, if questioned.

[Unregistered]

While an LLC or limited family partnership is a better vehicle, the is most certainly a step up for the value of stock held by the decedent. On sale of land Corp (S I should hope) will recognize gain which in turn increases basis and produces an offsetting loss.

[BOB W]

Basis

I was thinking the same thing, outside basis also for the gifting part.

[Bees Knees]

I think what the attorney is saying is that if the farmland is in a corporation, the owner can then start to gift shares of stock to the kids in $12,000 or less increments per year to avoid filing a gift tax return. As the kids own more and more of the corporation, the original owner reduces his estate tax liability. Then at the death of the original owner, any remaining shares of stock would receive step up of basis.

The only thing the corporation accomplishes here is to provide a vehicle for gifting a portion of the land each year to the kids. It is difficult to gift a small fraction of a piece of land to someone. It is not difficult gifting shares of stock in a corporation to someone. However, you can’t have your cake and eat it too. Whatever escapes estate tax through gifting does not receive step up of basis. Whatever does receive step up of basis at death is subject to estate tax.

[BOB W]

We all assumed .........

.......... it was a C corp because we know C corps are problems in this setting. Maybe the attorney is VERY smart and was going to use an S corp. Ha Ha

[veritas]

Gifting shares of stock in this manner would be considered a stepped transaction and probably would create a big gift tax problem

[Snaggletoof]

Jainen

Going back to Jainen's post - land owned by corporation receives no step-up upon death of the shareholder. Is there a statute preventing this or is it simply because the corporation never really "dies" and must hold the land on its books at its historical value?

The shareholder dies, and the corporation has land with original value of $100,000 and FMV of $500,000. Corporation receives no stepped-up basis. However, the stock of this corporation is owned by the decedent's estate, and the value of these shares is now marked up to FMV. The value of the shares thus includes the $500,000 FMV.

If the above land is sold by the corporation, there is a taxable gain of $400,000 to that corporation, and if it is a C corp there is no favorable capital gain treatment. However, if the corporation were dissolved and its assets transferred to beneficiaries upon retirement of shares of stock, then would the beneficiaries ultimately own the land at a $500,000 basis?

[jainen]

Yes they would!

>>would the beneficiaries ultimately own the land at a $500,000 basis?<<

Yes they would!

But then, of course, the corporation would still file Schedule D to report its taxable gain on the liquidating distribution.

[Matt Sova]

Gain on sale

Jainen is correct. The Corp owns the land. The only thing the beneficiaries receive at death are the remaining shares of stock. What are they going to do, sell the stock to a real estate developer? Doubt it.

[OldJack]

While an LLC or limited family partnership is a better vehicle, the is most certainly a step up for the value of stock held by the decedent. On sale of land Corp (S I should hope) will recognize gain which in turn increases basis and produces an offsetting loss.

An LLC can issue "membership certificates" or "units of ownership" that represent the same basic ownership as common stock of a S-corporation. Thereby gifting of units of ownership can easily transfer ownership of the LLC.

[Snaggletooth]

Sova

Good grief Boy! Where U been?

Good to have you back.

Snag

[Roland Slugg]

Fire that lawyer

What a gawd awful idea. It sets up a lose-lose situation where the corporation will needlessly pay a big tax when it eventually sells the land, and the shareholders will probably realize a big capital loss, which they may not be able to use for many years, when the corp is liquidated. Same result if the corp is liquidated before the land is sold, as Jainen correctly points out above. [Code §336(a)]

Valuing and gifting the shares isn't really any easier than valuing and gifting the land. In both cases there would need to be an appraisal done at the time of each gift. To make a gift of some of the land, just divide the desired gift amount by the land's appraised FMV and express as a percentage. Thus, a $12,000 gift in land worth, say, $5,000,000 would be an undivided 0.24% share.

[OldJack]

Valuing and gifting the shares isn't really any easier than valuing and gifting the land. In both cases there would need to be an appraisal done at the time of each gift. To make a gift of some of the land, just divide the desired gift amount by the land's appraised FMV and express as a percentage. Thus, a $12,000 gift in land worth, say, $5,000,000 would be an undivided 0.24% share.

Well... that is the save way to calculate the percent of share, but you would get more share for the same $12,000 if market or other discounts were considered.