Switching over to an S-Corp while holding a property?

Question

I have 6-7 houses/lots, and i want to switch over to an S-corp. One in particular that im in the middle of closing right now. The S-corp has already been created, so if i create an S-corp account to have the money deposited into. Is this sufficient to reap the S-corp benefits at the end of the tax year?

-The one under contract is a flip, which im due to gain a larger amount of profit from. So, im trying to take advantage of the wages/dividend rule to offset some of my self employment tax on it.

David M. · Answer

@Sean H.

"I plan to transfer the full proceeds into my s-corp account..."  I think therein lies the problem.  Again, you have to consider you company as a separate entity.

For example, imagine "me" as your S Corp.  You sell a property.  How do you "transfer the profits" to 'me' so that I pay the tax and its not reportable as profits to 'you'?

As just mentioned, you need to transfer the property first to your company (I think its basically called capitalization), then your company sells the property to record the proceeds.

Make sense?

Justin Sullivan · Answer

I did this with my businesses I have an LLC an S-corp and Personal accounts. My businesses loan or "donate" funds to others at times. I would def consult with you accountant but I have transferred funds from time to time. So just transfer everything over and quit claim the deeds to the s corp and mark everything you transfer as equity.

Hope this helps

Sean H. · Answer

I plan to transfer the full proceeds into my s-corp account, and just pay myself wages out if it.

the only thing I wasnt sure of, is I bought it in my name, bought all the materials in my name. Now I'm transferring the final product to my s-corp name. So is that all it would take to create "tax ownership" of the property?

David M. · Answer

@Sean H.

So, you formed a LLC or C Corp and elected to have it taxed as a S Corp...

I'm guessing you personally hold Title to the properties?

This current transaction..  who is the seller?  ie Do I still guess correctly that its you, personally, since you hold Title?

If the above holds, then its a simple "game" of follow the money in my layman's mind.  You personally get the "dealer profit."  To take advantage of the S Corp, one way could be to have had transfer ownership to the S Corp (I believe one way is as part of capitalizing the S Corp).  Then, the sale would be from this buyer to the S Corp.  You can't just willy-nilly transfer your "profit" from yourself to the S Corp.

The underlying entity, is just that --- a legal entity.  So you need to treat it as a separate "person."  For example, when I sell one of my flips, I can't just "transfer" the profit over to you and have you pay the tax --- well, there might be a way but I hope you get my point.

So, since the S Corp would have sold the property, then the check out of closing would be made out to the S Corp.  Yes, then you deposit the funds into the S Corp account...  etc. etc. etc.

Of course, consult some qualified professionals.  I hope my ramblings made some sense.  Good luck.

Sean H. · Answer

So, can someone please answer my original question? Im not asking whether an S-corp is applicable to my situation. I already know it is.

Im just asking how to put into action? Do i merely just transfer my property into the name, and put the proceeds into my S-corp account. Or is it more than that?

Ashish Acharya · Answer

Being a dealer actually works best for the S-Corp or even C -Corp.

If these land were acquired a years ago, these might be some planning opportunity to avoid ordinary income/ self-employment income.

Sean H. · Answer

I don't do rentals, theyre only flips and new builds, and i make 100-200k PROFIT each. So, yes. An S-corp is necessary. Most accountants have pretty strict definitions of what defines a dealer. So, as long as im labeled as a dealer, I see no disadvantage to an S-Corp.

Michael Plaks · Answer

@Sean H.

Time to hit the brakes and figure out what you currently have, how you're using it now and what you're planning to do with the properties.

Rentals do not have the SE tax and should never go into an S-corp. Flips might potentially benefit from an S-corp, but you need to be confident in how much you will clear from these flips AFTER all expenses. The amount should be high enough to justify the S-corp game, and your entire tax situation needs to be evaluated before you take this route.