Selling your house

[veritas]

to your C Corporation?

What if you had a C Corporation which has ceased operating an activity and has accumulated cash an you want to get it out tax free.

And you wish to sell your home to downsize or move.

You sell the home for full market value and exclude the gain up to $500k and you pay no tax upon receiving the cash which would have been treated as dividends. The corporation now rents out the property with a higher value than the taxpayer and receives larger depreciaton deductions.

Crazy?

[S T]

Real Estate in a Corporation

I thought that a Corporation owning real estate was not a good idea? Is this a tax avoidance scheme?

I found a website that is outlining much the same scenario as you posted.

I would say if it sounds too good to be true, it probably is!

Sandy

[les grans]

And "at the end of the day" what've you got? You've got a C corporation with a pile of cash (from the rental income of your ex-residence) that also owns a highly appreciated piece of real estate (you hope) and you've still got a serious case of potential double taxation.

Maybe an S corporation would get to a better result... Maybe you'ld have to wait ten years for the built-in gain to disappear. Maybe there's a better plan... I don't know.

[OtisMozzetti]

Issues about the buyer, a related party

Is this a tax avoidance scheme?

I would say if it sounds too good to be true, it probably is!

Sandy

Is a sale to a corporation in which he owns more than 50% a sale to a RELATED PARTY? Is the home sale exclusion allowed on a sale to a related party? Are there any restrictions on the depreciation by a related buyer? If there should be any gain on the sale to the related party, is that gain characterized as ordinary gain instead of capital gain?


And, as Sandy noted, isn't the corporation going to have to pay ordinary corporate tax on any future gains in the real estate value, on top of whatever you may pay when the corporation distributes those future gains to you?

[veritas]

I was reading

Kleinrock's tax planning guide when I came across the idea.

I was thinking another wrinkle would be to carry a contract for part of the sale thereby reducing the income the C Corp would have.

[WhiteOleander]

Well, if the theory of the corp being allowed to buy the house from the s/h holds up and most if not all of the accumulated earnings are now gone, why not have the corp sell the house?

It would sell for basically the same price the corp purchased it for because the markets don't really fluctuate that much now, so no great gain or loss to deal with. And then the corp could be closed out.

[veritas]

Well, if the theory of the corp being allowed to buy the house from the s/h holds up and most if not all of the accumulated earnings are now gone, why not have the corp sell the house?

It would sell for basically the same price the corp purchased it for because the markets don't really fluctuate that much now, so no great gain or loss to deal with. And then the corp could be closed out.

The problem then would be how to get the cash out of the corporation as before the sale.

[erchess]

I am enjoying this thread

but I share some questions and observations that seem to me to have been raised but not answered.

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

[WhiteOleander]

The problem then would be how to get the cash out of the corporation as before the sale.

I see your point.

[veritas]

I don't see a prohibition

but I share some questions and observations that seem to me to have been raised but not answered.

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

for a sale to a related party except for a remainder interest.

[JG EA]

I thought that a Corporation owning real estate was not a good idea? Is this a tax avoidance scheme?

I found a website that is outlining much the same scenario as you posted.

I would say if it sounds too good to be true, it probably is!

Sandy

I agree. When examined what would happen? Would the corporation have a business purpose when applying with the state? Would the corporation have money form the shareholder to buy from the shareholder? Or would all the transactions be on paper only? Would the IRS view this like they do trusts that have no purpose except tax avoidance?

When discussing abusive trust arrangements the IRS said "Substance rather than the form of a transaction is controlling for tax purposes."

[Burke]

Can you exclude the gain on a sale of a residence if you sell to a related party? If not, is a wholly owned corp not a related party? Are you not going to run into the double taxation problem? Individual tax rates are currently low historically speaking and I don't see a great deal of benefit in deferring the taxation of income. It therefore seems to me that you are better off doing this with an S Corp and to avoid the built in gains problem it is better to create a new one than to elect S Status for the current one. In fact, if I had a client whose corporation went a year with no activity I would talk to them about possible dissolution.

I have researched this and do not find any reference to restrictions for the SALE of a personal home to a related party. It is a capital asset in the hands of the seller, so gain is reportable (to the extent it exceeds the limitation (500/250K), and no loss can be taken. If the corp (who would be a related party if taxpayer owns more than 50%) pays full FMV for it out of its own cash, then it owns the asset and can depreciate it under 1250. However, there are restrictions on 179 and MACRS depreciation methods for 1245 property, etc. etc. Corp would still have problem when asset is subsequently sold, so I don't see what this accomplishes. Especially if it is the seller who is now subsequently renting the property! This means the seller is taking tax-free money from the sale of the house, paying rent to the corp which is taxable to it, and then is paid back to the seller/owner as a taxable dividend? Does not make any sense at all. If corp is renting to an outside party, maybe. At least the income would be spread out over years. Still would have taxable gain from sale in the future, and rates might not be 15% then! Taxpayer might think about annual gifting of stock shares to spread the joy around.

[veritas]

A few observations

I believe there are companies that will purchase stock of corporations holding real estate.

Secondly this would probably work better with a taxpayer later in years so on passing the stock gets a stepped up basis. May be a way to devise assets to beneficiaries.

[les grans]

How about IRC section 1239:

(a) Treatment of gain as ordinary income
In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167.

Anybody have a problem with that?

[veritas]

I was going to mention it

But if Sec 121 eliminates the gain it's not an issue.