Hi

I have several several properties that I have exchanged through the years and now have a very low tax basis. The properties are owned by my S-corp but I would like to put them in my personal names. Will there be a tax consequence? the tax basis is much lower than market value.

Thanks

I moved this posting from 1031 Tax Deferred Exchange to the Real Estate Tax area.  Getting real estate out of corporations can be tricky.  It can often trigger a dividend tax.  I've asked our resident expert/CPA Tim Folkers to comment here. 

Yes.   When taking a asset out of an S-corporation it is treated as a distribution of property and must be distributed at current Fair Market Value.   Therefore, it would create a taxable situation to you.   As long as you keep doing 1031 exchanges, you should keep your S-Corporation active.

Good Luck,

Hi Tim,

I hope you are surviving tax season! 

Are there any proactive planning steps that one can take to get property out of an S corporation or is the real estate essentially stuck in an S corporation was it has either been contributed into or acquired by the S corporation?

 Bill - Unfortunately the exchanged property is pretty much stuck in the S-Corp for the balance of the owners life.   As with all exchanged property with a low exchange basis the taxpayer will either have to pay the taxes when sold and at that time recognize the gain that was previously deferred.   Or as with all estate plans has to die in order to pass along an increased basis.   So the taxpayers have to keep the S-Corp alive for their lifetimes until they die and get a Step Up in value of the stock that they own then have the challenge of either selling the corporation or selling the assets.  

Some owners will transfer the S-Corporations to their heirs and thereby pass the ownership or control of the real estate to the heirs, but that does not solve the problem of taking the real estate out of the S-Corp.   

I never recommend that potentially appreciating real estate be held in a corporation - either S or C!   An LLC is the perfect entity to put real estate in offering the protection and segregation of liability without the issues of the corporation.

The value of the real estate inside a S Corp is $15Million  and the shareholder's basis is $500K. Is there a capital gain within the S Corporation on the $15K Fmv less the tax basis of the real estate or does the shareholder get $500K of distribution at FMV then a sale of $14.5 Million. If the shareholder had basis before the sale or distribution of $15 Million can the shareholder take a distribution of $15Million? For a California corporation a deemed sale will create taxable income within the S Corporation and California taxes. If the S Corp is dissolved within the year of the sale, then at the individual level the capital loss on the increase basis offsets the capital gain from the S Corp.

As to the real estate in the S-Corp - I'm assuming by your question that it is being sold - then the answer is yes the gain would be recognized inside the S-Corp and passed through to the shareholder.    The shareholder could then take a distribution for the amount already taxed of the $15M (14.5Gain + .5Basis).

No if the property is distributed to the shareholder before the sale - the distribution is at FMV of $15M and taxed to the shareholder as a dividend.

I don't know about the liquidation of the corporation in the year of sale creating an offsetting loss.   This sounds like a plausible idea, but you will need to have your tax preparer do some further research on this. The distribution of the $15M to the shareholder would bring the inside basis back down to zero or near zero - so a liquidation may be the answer.

If the property is not sold - I would leave the asset in the corporation and recognize (and document) the inside vs. outside basis of the shareholder.

Good luck -