RE Held In S-Corp

[Matt Inouye]

Hey BP Community,

Long story short... before BP I received some "bad" counsel from a CPA to put our properties in an S-Corp instead of an LLC (properties are in Sacramento California if that matters).

Fast forward 5 years and some of the properties have almost doubled in value.  I was looking to do a cash-out refi to take money out while locking in lower rates, but now that the properties are in the S-Corp, I am unable to transfer back into my name to refi without creating a taxable event.

I am wondering if there are any strategies to moving these out in a tax advantaged way (I expect there will be some cost to doing so).

Some strategies that have come up in other conversations are:

1) Form LLC and issue a note to the S Corp with the properties as collateral... then if S Corp defaults on the note... the properties will be transferred with out triggering taxes (although cost basis would remain the same)

2) Have appraiser apply discounted valuations on properties due to lack of marketability (I am only a 50% owner of the S-Corp).  Then transfer or "sell" property back into personal name and pay taxes on a discounted valuation.  If this is possible, how much a discount can be applied to the properties?

What say you BP Community... have you ever had a similar situation?

Thanks in advance!

Aloha,

Matt

[Brandon Hall]

@Matt Inouye the asset does not get a discounted value. The shares you own will have a discounted value due to the illiquidity of your ownership interest in the S-Corp. You can sell the real estate, likely within the next month. It's unlikely you can sell the shares you own within the next 6 months. Your shares are what receive the discount.

I see a few options here:

1. Sell your shares to your partner and call it a day. You need a business appraiser (or CPA) and a real estate appraiser for this.

2. Distribute the property to members, strategically the ones with the highest basis, and recognize a taxable sale. You now have an asset that you can easily refi to pay the cap gain taxes and you enjoy a stepped up basis in the property.

3. Contribute the property to a Charitable Remainder Trust.

4. Apply for a business loan via the S-Corp (not technically a refi but you could pledge the S-Corp's assets as collateral and have access to capital).

OR

5. Create a subsidiary LLC in which the S-Corp takes a partnership stake in, transfer the asset into the LLC (not a taxable sale since the LLC is a subsidiary), and the avoid the disguised sale rules by not transferring the asset out of the LLC and into your personal name (assuming you also have a personal stake in the sub LLC) for a period of 7 years. This could work because an LLC presumably has an easier time obtaining financing.

Regardless, get with a CPA and make sure you understand the basis rules, sale rules, and what your current basis is.