S Corp Real Estate Title

[equinecpa]

I'm doing a return for a business whose books are a mess.

The S corporation shows depreciation on land and buildings. However in going through records I have found the property tax bill and it lists the individual shareholder as the owner.

It would be better if the individual actually owned the real estate for liability purposes -the business in question is an equestrian facility.

The shareholder purchased the land/buildings via a home equity line of credit and claims the interest on their personal return.

I'd like to remove the land/buildings from the corporate books but am unsure of the correct way to do this. I was thinking perhaps of filing amended returns replacing depreciation with rent? Or could I transfer the property back to the shareholders at ACB?

Thanks

Carolyn

[Snaggletooth]

Change It

For items which require a title (usually, all real estate and vehicles), I will absolutely not carry on corporate books when the owner insists on retaining title.

Unless engaged to do so, I would not go back further than the return I was responsible for, but I would make the change on the beginning balance sheet, even though it does not agree with the end of the preceding year. This requires an attached explanation. Buying this stuff with corporate money and then belonging to the owner is paramount to dividends. If it was contributed to begin with, then owners' capital should be reduced accordingly.

Reconstructing the balance sheet and individual ownership with depreciation can be a mess. If the corporation bought and distributed property to the owner, and dividends were not recognized, then the owner has no depreciable basis with which to write off against any potential rent.

I think you have to stand firm on this unless the owner is willing to change. My experience is in particular with vehicles. As a rule, the insurance industry will not cover corporate ownership unless there is a commercial package. Some cut-rate auto insurance companies do not offer this for vehicles. Owners don't want to deal with this so they continue to title their vehicles to themselves individually.

[awporbb]

llc/liability insurance

I'm doing a return for a business whose books are a mess.

The S corporation shows depreciation on land and buildings. However in going through records I have found the property tax bill and it lists the individual shareholder as the owner.

It would be better if the individual actually owned the real estate for liability purposes -the business in question is an equestrian facility.

The shareholder purchased the land/buildings via a home equity line of credit and claims the interest on their personal return.

I'd like to remove the land/buildings from the corporate books but am unsure of the correct way to do this. I was thinking perhaps of filing amended returns replacing depreciation with rent? Or could I transfer the property back to the shareholders at ACB?

Thanks

Carolyn

First and foremost, you need to get a written understanding and waiver of liability from your client as it relates to the years you didn't prepare, because you have a professional duty to either file amended returns or walk away from the engagement.From 37 years of experience, my best advice is not to accept these engagements in the future. It is sophomoric that real estate should not be put into corps, but since the title was held individually that's not your problem. There was no lease agreement, so there could not be rental income/expense, and therefore no allowable depreciation on the shareholders return( or the orporate return either). Therefore, I would start with the original cost basis, form an LLC with the real estate, have the client engage an attorney to prepare a formal lease agreement, and then form another LLC for the equastrian business(for legal liability purposes), complete a Form 8832, Entity Election, electing corporate return status, and then Form 2553, Subchapter S election.

[equinecpa]

Thanks for the replies - looks like I have more work cut out than I thought. I have already made a bunch of corrections to errors made by the previous tax preparer so amending will not be totally out of the question,though I do like the idea of rolling into a separate LLC.

I guess I've been amiss with regard to vehicles - I've never paid attention to the ownership on the title. In your experience will an auditor disallow the deductions claimed on a vehicle that is not titled to the corporation? It makes sense after all how do you depreciate something you don't own? But when does substance take precedent over form?

[Snaggletooth]

Form and Substance

Carolyn, since a corporation is a separate entity, such that the division of ownership and title is no longer amorphous, the form of ownership actually is the substance.

With deference to our new colleague from Evansville, it is true that the situation would be better served if real estate were not in the corporation. This avoids a whole host of problems should it become necessary or desirable for this real estate to change hands.

Awporbb, welcome to the board.

[Burke]

I would like a discussion about not putting real estate into corporations since it has been mentioned numerous times on this board and in this thread, but no one actually says why it is not a good idea. I have dealt with this situation with clients, and it has never provoked any issues.

[Edsel]

Hardly a Discussion

Burke, I would like to see such a discussion as well. I try to warn my clients about putting real estate in a corporation and most of them tell me that it will be there forever and ever amen.

One of the reasons is a requirement to record a disposition of real estate at FMV regardless of the selling amount and regardless of to whom it is transferred (for example, a related party).

See the discussion in TTB under the "BIG" tax (built-in-gains).

[JohnH]

I'd like to see a discussion on this issue as well. I have a client who bought a convenience store & land many years ago (before LLC's were popular) and was advised by the attorney to form a corp to own the property for liability protection purposes. The CPA at the time concurred.

The client is now retired and rents the building to someone else, so his C-corp just collects rent and passes it along to him in the form of salary plus some dividends. His management duties consist of walking over to collect the monthly rent check and occasionally hire someone to fix the roof, paint, repair the driveway, etc.

He says he plans to own it until he dies, and his financial advisor says the stepped up basis in the C corp stock will serve essentially the same pupose as stepped-up basis in personally-owned land. (Is he correct?) He also says the only way he would sell it would be if a buyer wanted it badly enough to pay him enough money to net the same amount as if the corp isn't in the picture.

One time I did run the numbers on what a FMV sale to an LLC would cost, but the tax cost is so high that he doesn't even give it a second thought. It would take years for the savings of SocSec and Medicare to net out against the taxes paid upfront on the sale - probably longer than he will live. Maybe I should be recommending some sort of action on his part, but as I see it the situation was handed to me in this form and unless he's interested in investing a lot of money into making some changes, things will just continue as they are now.

[S T]

Second or Third Vote

I as well as others would also like to see a discussion on real estate and the proper entity to own.

I have a similar t/p as John H, altho not in a Corp at this point, still holding as joint tenants for the real estate for a gas/convenience store with business in a partnership name (Calif, so LLC is probably not a consideration due to the gross receipts tax).

Sandy

[Bees Knees]

Here is your discussion. Your client has an attorney who advises your client to put his office building into a corporation. You say nothing as you think the attorney should know his stuff.

5 years later, your client wants to liquidate the corporation as it isn’t doing anything other than collect rent for the building. Your client thinks he can save money on your tax prep fees by reporting the income on Schedule E rather than all of those corporation returns you keep charging him for.

You say, well if you liquidate your corporation, you will now have to pay tax on the $200,000 worth of gain you will have due to the appreciated value of the real estate inside your corporation. Your client says he doesn’t intend to sell the real estate. He merely wants to stop filing and paying for all of these stupid corporation returns you keep making him file. You say it doesn’t matter that the real estate is not being sold. Those are the rules.

The client says, why didn’t you tell me this ahead of time? He thinks you are just trying to soak him for tax prep fees. You say it was his attorney who did this to him. He says his attorney is no longer around as he got killed three years ago fooling around with some other guys wife. You say sorry those are the rules.

Your client finds another attorney and files a lawsuit against you for malpractice.

[JohnH]

Bees: That pretty much sums it up, except the building is worth about a half million. The building has been fully depreciated, so only the land value is left for basis. I'm not worried about malpractice because he had a CPA doing his work when the building was purchased and for 5 years or so afterward. By the time I came into the picture, the only choice was a FMV sale, which we discussed at the time. Too bad he didn't consider my advice back when the building was only worth $200K - we'd probably be past the break-even point by now.

[Bees Knees]

As long as the client understands that the property should stay inside the corporation until sold, there shouldn't be a problem. Once inside the corporation, there really isn't anything else to say.

[Burke]

So, to summarize, as long as the property is sold before the corp terminates (whether C or S I assume), there is no adverse tax effect, since when the property is sold the shareholders (in a Sub S) will report tax on a capital gain just as they would if it were held in another type of entity. And the C Corp would pay the tax on the sale at its level.

[outwest]

So, to summarize, as long as the property is sold before the corp terminates (whether C or S I assume), there is no adverse tax effect, since when the property is sold the shareholders (in a Sub S) will report tax on a capital gain just as they would if it were held in another type of entity. And the C Corp would pay the tax on the sale at its level.

And when the C corp terminates or the cash is paid out as a dividend, the shareholders will be taxed again. Oh and the state also gets it's piece. All told, one projection was a combined 48% tax rate instead of a combined 18% had the property been held as a individual. Even my dumbest clients see that as an adverse tax effect.

[Burke]

Gotcha. All my experiences in this situation we have been discussing have been with SCorps, not C's, and in the SCorps the only reason for holding the real estate was investment (rentals). In all case, the properties were sold while the SCorps still existed.