Transfer real property from s-corp

[Joseph Skoler]

I have a piece of real estate owned by an s-corp (of which I am the sole shareholder).

It has appreciated substantially in the decades that I've owned it.

I would like to transfer it to an LLC (of which I would be the sole member).

But, I want to make sure I don't trigger the recognition of a capital gain.

How can I do that?

Thank you!

[Kory Reynolds]

The answer...you can't.  

Removing any appreciated property from an S-Corporation triggers a deemed gain on those assets by the S-Corporation (hence also by you) - it's as though you sold it at fair market value, so you get the joy of paying the taxes on the appreciation while receiving no cash.  The other joy you can have is that if you have a very low basis in your S-Corporation given it was previously a C-Corp for decades, you could end up up with a distribution in excess of your stock basis, thus triggering a gain there as well.  The icing on top of these joys - to the extent the property is depreciable in the hands of the recipient - it is an ORDINARY gain, and not a capital gain.  Even better...you can't take bonus depreciation on your newly acquired asset to help offset gain since it was acquired from a related party.

There is a way to effectively transfer out the future appreciation, but your historical appreciation is stuck in the Corporation - you can't get that out without triggering that gain.  Still depending on your estate planning, going through these jumps to save your historical appreciation (thus also a step up in the real estate upon death) could be worth it.