Dear UC
Interesting scenario.
I've read several cases on corporations, or S-Corps renting
property from owners, and perhaps vice-versa, in the last
Dozen or so years.
What you're proposing is risky.
And to research it properly, expect someone (your accountant?) to
spend at least 2-3 hours. Expect to pay that much for a solid answer.
And DO have a written opinion in your hands before you do it.
That way, if the whole thing falls apart later, you won't face
penalties, since your decision was based on expert advice.
Getting an answer from here won't cut it if you're audited.
Why would I not recommend putting a residence into your S-Corp?
1) Because you would lose the $250,000 ($500K per couple, in case
you get married, or get a partner) exclusion on profits when I sell the house.
2) If you plan to live in the house until your death,
well, it just may not get the step-up in basis to Fair
Market Value, that your residence would. (Your coporation's
value might increase, but not the house.)
3) You can't just quitclaim title to the house from you to the
business. You'd need to sell it. And you'd need to write a
formal note from you to the business.
Otherwise, if you simply quitclaim the house -
a) YOU won't be on title, but you'll be liable on the loan.
b) The S-CORP won't be on the loan, but will be on title.
So NO ONE will be able to take the mortgage deduction.
To qualify to deduct the interest, the person/entity must be
both on title AND on the loan. (This problem comes up often.)
If you do have the corporation own it, you would have to
pay rent on the value of the personal use - i.e. 2/3 of the
home. You would get no deduction for the rent. But the
corporation would have to report the rental income.
4) You could doing a 1031 exchange. You wouldn't be able to
exclude that $250,000 from the profits. ALL the profits would
be taxable and/or subject to the rollover. If IRS were to
audit and end up objecting to this whole arrangement, you
could nullify the 1031 exchange and make all the profit taxable.
I don't like the risks.
There are still some special tax issues to having an S-Corp
sell real estate. I'd have to look them up. But, I thought
it might be a good idea - and someone gave me some citations
telling me why it's too complicated, with respect to drawing
those sales profits out.
You're better off keeping it in your own name.
1) The 1031 exchange you mentioned - you wouldn't need one
if you owned it personally. Remember, $250,000 is excluded.
2) Under a recent interpretation of the personal residence
tax laws, IRS announced that they would not be taxing the
business share of the profit on the sale of a mixed use
residence. They would only tax the depreciation taken.
http://taxmama.com/IRSnews/013103.html
3) If you own it, the business could, conceivably take a
deduction for the rent on the space it uses. Doing that
would let you deduct 1/3 of the insurance, gardener,
maintenance, etc.
4) With an S-Corp, you don't really need to play those
games. You'll end up paying taxes on all the net income
one way or the other. (If the corp pays you rent, you'll
have to report it in income. Net effect? Very little.)
These are just some issues for you to think about.
(As it happens, I will be teaching tax professionals an 8-hour
workshop on issues just like these in the fall, in 6 US cities.
As we speak, I am researching all the entity issues, and how
to hold assets, sell them and dissolve entities. I am paying
someone several thousand dollars to supplement and confirm my
research. These are not easy questions.)
Good luck with your decisions.
Your TaxMama-ga |
