Discussion:C CORP LIQUIDATION

Why not leave it alone and let the heirs inherit the stock? They'll get a step up in the basis of the stock to its FMV at the date of the shareholder's death, so only one level of tax on liquidation (the corporate level).

Death.

If you want more options but aren't willing to share, then use the yellow SEARCH box. More answers can be found there for free.

Besides, your question shouldn't have even hijacked this thread.

Search: C Corp Real Estate

For a situation of this magnitude you really must get local professional advice. All we can do here is give you some basic principles or issues to think about -- but you need to sit down with a pro who can have access to all of the facts and circumstances and the desires/goals of all of the parties. There's no way we can do that here. Also, you will need both tax and legal advice.

One approach would be to do the 1031 exchange in the existing corporation. So, C corp owns Blackacre with a basis of $1 million, exchanges it for Whiteacre with a FMV of $3 million. No gain recognized (except to the extent of any boot received), and C's basis in Whiteacre is $1 million (plus any gain that was recognized). If C remains a C corporation and sells Whiteacre, it will recognize gain to the extent of the difference between the selling price (presumably at least or more than $3 million) and the $1 million inside basis of the property. The same gain will be recognized if C distributes Whiteacre to the stockholders and liquidates. In either case, if the corporation is liquidated, the stockholders will have capital gain to the extent of the difference between the cash and FMV of property distributed and their basis in the stock. Two levels of tax.

You could eliminate one level of tax by converting to an S corporation; however, in order to avoid the corporate-level tax on the gain the corporation would have to hold Whiteacre for at least 10 years after the S election. Otherwise the gain would be taxed as if the corporation had been a C.

You can't transfer the property (either Whiteacre or Blackacre) into an LLC or family LP without recognizing the gain at the corporate level, or making the corporaton the owner of the LLC -- which doesn't solve the double tax problem in the end.

That's just one approach; I'm sure there are other options, and which is the right one depends on numerous factors.

The route which seems to be the least hurtful seems to be moving the C to an S and waiting for the 10 years. However, some of the reading that I find on this site really advises against having any RE in any corp. If this is true, then what befalls us?

The real estate is a large cattle ranch that the corp. would like to sell and 1031 into another, within the C corp. Shareholders do not receive any dividend from the corp to date, only to inherit the corp when parents are deceased. The issue of basis is a question??? and tax consequence to shareholders upon inheritance. You may have addressed this issue already but there may be some other information to go with.

The real estate is already in the corp. What does it matter if it stays there? As I can understand, anything that is done will cause great tax burden. HELP!!!!

Watch out for the S corp issues of ownership, etc. since whatever profits pass out must be in accord with ownership. But you can work that out.

One more question though, is there a time period which a C corp must/can convert to an S corp? i.e. Within the first 3 months of the corp. tax year? Believe I got that from some of the reading on this.

DTucker, I have received your email and will contact you today. Pardon the delay. I took a long weekend. In the meantime, these folks have given you solid advice.

A couple notes...

1) If you want your money now, an S-Corp solution isn't for you. A lot can happen in ten years. The built-in-gain (BIG) isn't prorated. If in nine years, you need the money out, you're in the same position as you were on day one in terms of the ticking tax time bomb. (Said another way... would you buy a share of General Motors stock if you knew you couldn't sell it for ten years without paying a 40% penalty? That's a hefty gamble.)

2) Unless you have a real interest in owning real estate and have a specific property or group of properties you want to own, don't do a 1031 exchange. I have seen a lot of people take the ugly girl to prom because they were short on time and backed into a corner. If you can find something with an 8% or better CAP and wouldn't mind owning the building for the next ten or so years, a 1031 might be a good deal. On the other hand, rolling into triple-net CVS drug store with a 4.75% (or even 5.5% CAP) is a really bad idea. For infinitely less risk and about the same rate of return, you could buy a CD.

(As a side note, if you do head into a 1031, you may want to leverage-up and go bigger. Many 1031 buyers think too small and try to match their next purchase to their last purchase. If you're not moving up, you're better off taking the money off the table. Four or five million could easily capitalize a $20-40M building. As long as the property throws off enough income to cover the mortgage, your $4M could build a great asset to pass along to the next generation. Think about not just the next ten years but the next 40.)

One opinion. An 8% cap rate? Says who? There would be a lot of money floating around the economy right now if no one accepted less than an 8% cap rate.

The CVS triple-net is a bad idea at 5.5%? Well that's one person's opinion. I know clients that roll into these for the appreciation (last I checked CDs didn't appreciate but with some of the competitiveness in banks, who knows...) and the lack of headaches a long-term, triple-net lease, national credit tenant might bring.

I am not saying cap rates today are good or bad, I am simply indicating that you have to look at the overall market, assess whether you are okay with the historically lower cap rates, look at the potential appreciation and recognize that perhaps there are other considerations.

Most 1031 exchanges are more akin to shotgun weddings than the beautiful culmination of years of romance. I really think one factors driving down CAP rates is the 1031 exchange hype. Folks are getting stupid with their money in an effort to avoid historically *low* capital gains rates.

Under current law, we know capital gains rates will hit 20% in 2010. Why are people using a 1031 exchange to defer a 15% pinch until it becomes 20%? There are people who I respect who say Congress will act to keep it at 15% past 2010. I don't know anyone who believes the rate will fall below 15%. Do you?

Do you your clients know that the five-year rent hikes in their NNN properties with 20-year leases are less than the average market rent increases in almost all cases? Do you clients know that at the end of their 20-year lease their buildings will be worth less than replacement value? Do they understand that they will pay at least an extra 5% in taxes on their gains by deferring past 2010? Do they understand that if CVS flames out in the same fashion other major national retailers have, their NNN leases could be less than that cost of the paper on which they are printed?

I recently spoke with a commercial real estate investment banker who I really respect. He said that when you read 'NNN; perfect for 1031 exchange' in a real estate ad, you should mentally translate that to 'overpriced but if you have a 45-day gun to our head, you might buy it anyway'.

I know you work as a qualified intermediary so you will have a different view of the situation and I'm certainly not blaming you personally for the 1031 exchange market. Were I able to have a wish, it would be that folks take a hard look at the property and the numbers before they jump into an exchange. In the couple dozen situations in which I have detailed knowledge of the transaction, fewer than five of the transactions were financially sound and in alignment with the client's true goals.

(I'm certainly not the smartest person at TaxAlmanac, nor the best educated, nor the most experience or even the most prolific, but I do believe I'm the most long-winded. Is there an award for that?)

Our firm, pcgxchange, purchases shares of such companies and has done $700M of transactions in just that way.