How do I acquire my rental property in my S-corp

Question

I own a property in  NC and I have a S Corp set up in Nevada. I'd like to acquire the property in under my S-corp to provide me the protection of the corporate vail. Also take advantages of some more tax write offs.

Can anyone offer some ideas on how I may be able to accomplish this.  I'm still paying off the mortgage or more so my  tenant  is.

Will me having a mortgage make the process of acquiring the property under my corporation  more difficult?

Can it be done with little to no money?

Steven Hamilton II · Answer

There is a second issue.  Personal Holding Company issues.

Personal Holding Company
	
		Generally, a corporation is a PHC if it meets both of the following requirements.
	
	
		PHC income test. At least 60% of the corporation's adjusted ordinary gross income for the tax year is PHC income. See the instructions for Part II and the Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and the PHC Income Test(Worksheet), later. Also, see Specific Instructions below.
		Stock ownership requirement. At any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is directly or indirectly owned by five or fewer individuals.
		
			For purposes of this requirement, the following organizations are considered individuals.
		
		
			A qualified pension, profit-sharing, or stock bonus plan described in section 401(a).
			A trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions.
			A private foundation described in section 509(a).
			A part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).

Personal Holding Company

Generally, a corporation is a PHC if it meets both of the following requirements.

• PHC income test. At least 60% of the corporation's adjusted ordinary gross income for the tax year is PHC income. See the instructions for Part II and the Worksheet for Figuring Ordinary Gross Income, Adjusted Ordinary Gross Income, and the PHC Income Test(Worksheet), later. Also, see Specific Instructions below.
• Stock ownership requirement. At any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is directly or indirectly owned by five or fewer individuals.
		
			For purposes of this requirement, the following organizations are considered individuals.
		
		
			A qualified pension, profit-sharing, or stock bonus plan described in section 401(a).
			A trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions.
			A private foundation described in section 509(a).
			A part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).
• A qualified pension, profit-sharing, or stock bonus plan described in section 401(a).
• A trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions.
• A private foundation described in section 509(a).
• A part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).

For purposes of this requirement, the following organizations are considered individuals.

• A qualified pension, profit-sharing, or stock bonus plan described in section 401(a).
• A trust described in section 501(c)(17) that provides for the payment of supplemental unemployment compensation under certain conditions.
• A private foundation described in section 509(a).
• A part of a trust permanently set aside or exclusively used for the purpose described in section 642(c).

Exceptions. The term “personal holding company” does not include the following corporations, even if the two requirements above are met.

• Tax-exempt corporations.
• Banks, domestic building and loan associations, and certain lending or finance companies.
• Life insurance and surety companies.
• Certain small business investment companies operating under the Small Business Investment Act of 1958.
• Corporations under the jurisdiction of the court in a title 11 or similar case.
• Foreign corporations.

Roy N. · Answer

@Steven Hamilton II

I get the taxation in the scenario you describe, but part of the reason behind incorporating an apartment building (or commercial property) in its own company is, you can just sell the company.

If I were to incur the capital gains in my own hands, the treatment wouldn't be any gentler.  There is also the balance with liability exposure, and succession planing to consider.

Finally, when it comes time to pull monies out of the company as dividends, it will be taxed at a lower rate than earned income (at least here).

Sean Leone · Answer

Most lenders will force you to pull it out of the S corp before refinancing which is why having it in there is not a good idea. You definitely want to have a good CPA with experience with real estate investors. My CPA told me a horror story of a client with a $300m asset In an S corp that cost them dearly to pull out.

Steven Hamilton II · Answer

Roy,

*Ignoring land value here.

I will begin with a 100k property bought in a C-corp.

If you depreciate it for 15 years. you are looking at about 50k in depreciation taken. Adjusted Basis of 50k.  Appreciates over those 15 years to 200k.

You now have an asset worth 200k basis of 50k. You sell it and you have recapture/gain of 150k that is taxable. For a C-corp the tax on 150k assuming no other income is: $41,750 + $7,500 state tax.

If you distribute that to yourself to use personally you are looking at a "deemed sale" anytime the asset is transferred out of the corporation. This means the corporation reports it as if it was a sale.

Now you issue a dividend to yourself of that property at the Fair Market Value: 200k of taxable dividend income.  This means a tax of $30k or $40k depending upon your tax bracket. Plus 5% state tax: $10k

So a tax of $89,500 - $99,500 PLUS~ $17,750 because of an average of 5% state income tax on the dividend and corporate income.

-Steven

Roy N. · Answer

Steven:

I need to ask why?

Here in Canada it is quite common to have a holding company hold real estate assets.   For mid-size+ commercial properties it is common to "incorporate the property" (i.e. create a company whose only asset is the property).

Steven Hamilton II · Answer

@Mary B. ,

Actually it won't change his taxes. He will pay tax on net profit to NC and then he will pay anything in excess of NC tax in NY.

NV is irrelevant other than an extra filing fee. IF he gets sued it will most likely be in NC. He also more than likely has to register in NC since he is doing business there.

Jonathan Jacobs · Answer

So is there a tax advantage  for having a house I'm renting  now  as an individual and not as a corporation and Business?

@Mary B. You are correct I'm all over the place. The Nevada thing is  something i set up back in 04 from Dean Grasiosi in all his wisdom and guru-ness. It's going to cost me  money to dissolve the S corp . I'm trying to find away to keep it and use it to my advantage.

Mary B. · Answer

Your corporation is registered in Nevada. Your property is in North Carolina and you live in New York. Uh I don't know what sort of tax savings you were aiming for but it looks like you've tripled your state taxes. Hopefully you have properties, virtual assistants or some business activities in Nevada....

Kudos,

Mary

Steven Hamilton II · Answer

If for any reason your S election becomes terminated you are looking at SERIOUS consequences for the RE.  IF you ever distribute it from the corp to yourself personally it is subject to tax at the corporate level between the difference of adjusted basis and fair market value.  You also would have to account for a distribution at fair market value which if greater than your basis could be a bad situation.

Steven Hamilton II · Answer

@Jonathan Jacobs ,

NEVER EVER EVER EVER hold real estate in a corporation unless it is inventory.

Remember she still has to spend at least 50% of her time in RE.