I have a client which is a C-Corp. The 100% shareholder of the C-Corp purchased a residential investment property which would be her 3rd one. She would like to rent it to the C-Corp. The C-Corp is a school and the investment property is about 200 miles away. She would like to use the property once a month for herself and as a perk for her teachers, letting them use it here and there on the weekends. First with her wanting to rent the property and use it probably more than 14 day out of the year it would be considered mixed use property. Second, letting the teachers use the property would be a fringe benefit taxable to the teachers for the FMV of the use of the property. I know she does not want to include the benefit in the teachers' W-2. Third, if the IRS were to perform an audit, it would be hard proving a real business reason the school needs to rent the investment property. I just wanted to get other peoples opinion on the treatment. I think she should probably not rent it to the C-Corp and just keep the property as her own investment property.
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An option
She could probably rent it by the day to the corporation if there is any justifiable reason for the place to be used occasionally. -
In as much as this C-corp is a related party to the one shareholder owning the property, it is a controlled corporation with little, if any, justifiable business reason to rent such property. If so held by an IRS audit the payments to the shareholder would most likely be reclassified as taxable 1040 dividends from a C-corp with no deduction to the C-corp.Comment
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Thanks
OldJack. That's what I was thinking. It's probably best for her to not rent it to the C-Corp and save herself a lot of problems.Comment
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