Discussion:S-corp - land sale or distribution ??
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| 11 April 2008 | |
| I need help in figuring the best way to have my client transfer a piece of raw land out of her s-corp (not my idea) and move it into a new LLC.
Here are the facts: S-Corp owns land with FMV of $ 500,000 The basis of the property is $ 320,000 The s-corp owes the S/H $ 340,549. Would it be best to distribute the land to the S/H as payment for the loan and show a $159 K gain verses a $180K gain if the s-corp was to just sell it directly to the new LLC? Any advice is always appreciated. | |
RoyDaleOne (talk|edits) said: | 11 April 2008 |
| Why is this beubg done?
From the facts given you have a lose lose situation. The holding period may start over. Paying tax, having an exposure to tax. I see no "real" benefits. The S Corp could contribute the land to the LLC and be the partner tax free. | |
| 11 April 2008 | |
| There is no real purpose for keeping the s-corp active. There is no other activity there, she really meant to start an LLC not an s-corp. She didn't discuss the purpose of the company before she created the corporation.
Wouldn't it be best to take the hit and just close down the s-corp? What would you recommend to your clients? | |
| April 11, 2008 | |
| The main issue is what does she want to do with the RE? If she's inclined to hold it, then maybe you're better not doing anything unless you've got the opportunity to get it out for small tax cost if the market collapsed. Otherwise, why create tax over nothing? Unless she's somewhere where she believes that the future gains would be enormous, then, yes, in that case only, cut bait and take the hit now to make a smaller hit later. But if she'll sell it eventually anyway, the tax will pass out the same either way. Only if she wants it out of the corp for some reason would it create tax. I'd just leave it alone. | |
| 11 April 2008 | |
| I have more information from my client now. She believes that the property is worth the same as the FMV. She doesn't want to pay for an appraisal because it will cost about 3,000. Would we be able to use the property tax statement to estimate the FMV? She plans to develop the land in a couple of years. Right now it is zoned as residential. She wants to get the zoning changed so she can sell it to a Chinese group so they can build a Buddhist temple. | |
RoyDaleOne (talk|edits) said: | 11 April 2008 |
| I still can not find any reason to move the land.
Can you show me some benefits (reason) for the proposed transaction? | |
| April 11, 2008 | |
| If the FMV is the same as basis, then go ahead and move it out. Like Roy, tho'...it sounds like in this case, there's not much to accomplish anyway. If she develops it or sells it to the Chinese, the same income will flow thru out of the corp as it would from a Sch. E/C...so why bother? Yes, it violates our rule of NEVER EVER EVER NO NOT EVER...but since it's there and it'll be gone in a few years, might as well leave it be. | |
| 11 April 2008 | |
| The FMV is not the same as basis; it's $500K and the basis is $320K, according to Cindy's first post. I agree with JR1, leave it alone. Why march in and volunteer to pay tax on $180K now (or $160K if you offset the loan)? The S corp is fine as long as you're not trying to get the property out of it by some means other than selling it to a third party. One level of tax when it's sold. | |
| 11 April 2008 | |
| The numbers changed. It appears that there will be NO gain. My main concern now is that there isn't an appraisal to establish the FMV. Hence, my earlier question about using the value shown on the property tax bill. Will it be okay to use it? The value shown there is less so I don’t think it would be a problem to just use the current basis and show no gain.
Part of the reason I was suggesting that she move the land is to comply with the as JR said, "it violates our rule of NEVER EVER EVER NO NOT EVER". Plus there is an expectation that the value will go up but not sure how soon that will be in this market. I also found out that she has another property in the same s-corp that the property tax bill has valued at 1.4 million. Maybe this is one that she should contribute for an interest in the LLC? I need to find out what her plans are with this property as well. As always I appreciate the input from everyone! | |
| April 12, 2008 | |
| Get a realtor to give you a cheapie appraisal. They need the money now. And if it's close to basis, move it now. | |
Eastendcpa (talk|edits) said: | 12 April 2008 |
| I tend to agree with the others...leave the property as is. Do you know what the basis is in the property valued at $1.4 mill? | |
