Discussion:1031 exchange by S Corp
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Discussion Forum Index --> Tax Questions --> 1031 exchange by S Corp
| 26 October 2007 | |
| I have a client - a S corp with 4 stockholders that own a apartment building that is about to be sold for 4,000,000.
A have a few questions: 1) does the S corp have to do the 1031 exchange or could each of the 4 stockholders do a 1031 or decide not do one & pay tax on the sale. Do all 4 stockholders have to do the exchange? 2) can a stockholder use his share of the proceeds (25% of 1 property) to buy (exchange) four different properties or does it have to be 1 property for one property. for example - exchange one stockholders 25% share of proceeds of 1,000,000 for 4 different properties of 250,000 each. Thanks for your advice Tim | |
| 26 October 2007 | |
| For question 1 - for sure the Sub S goes through the mechanics of the 1031(I assume the Sub S owns the Prperty).
If the shareholder's want to participated they will have to own the property and that will greatly complicate - and get tax expensive - the Sub S would have two choices if the shareholders are going to be owners: Distribute the property as a possible taxable distribution (at ordinary income rates) or Sub S corporation would sell to the shareholders and causing a Sch K/K-1 capital gain. I would also read about when to use the front of the 1120S return tax computation. For question 2 the corporation is the owner and the board of directors/shareholders will have to vote on whether the corporation will re-invest the proceeds. Thus part of the exchange can be taxable with shareholders getting distribution checks | |
Sherman1031 (talk|edits) said: | 27 October 2007 |
| TXHelper is right on with question #1. The distribution to the partners in a sub S will result in a taxable event negating the idea of three of the four, for instance, individual partners doing the exchange. What does work is having the partner(s) that don't want to do an exchange distribute out an undivided interest in the property (taxable event to them) with the S-Corp owning the remaining portion. Then the partners that want to do an exchange can continue on with a 1031 in the S-Corp's name.
I believe what you are asking in question #2 is whether you can exchange for more than one property of lesser value. Absolutely. We exchange four for one and vice versa. If you exchange for four properties, you'll have to use the 200% rule for 45 day identification purposes. Let me back up a bit with that. The ID rules allow a three-property rule where you ID three potential replacement properties within 45 days of your sale. Since under your scenario, the S-Corp might exchange for four porperties, they can't use that rule. They'll need to use the 200% rule which allows for more than three properties as long as the total value of all ID'd properties are not greater than 200% of the sales price of the reliquished property. | |
