Transfer of real estate from Family corporation to their son

[Naveen Mohan from New York]

Ihave a client who had a commercial income producing proeprty in a husband/wife S-corporation. They have transferred this property to their son for one dollar and they are reporting this gift on their gift tax return.

How do I handle this disposition of asset on S-corporation tax return. The S-corporation is still active because it has other real estate inside it.

also what will be the basis of this asset on son's tax return when he file his schedule e.

Thanks for your help in this matter.

Naveen Mohan

[Guest Taxed]

Interesting. It is definately not a "arms length" transaction since the owners of the Sub S (100% mother and father) transferred it to their son (lineal descendent).

What was the FMV of the asset and owners basis at the time of transfer? Was this a fully depreciated asset?

[Naveen Mohan from New York]

This was a commercial building with laundromat onthe first floor and 4 apartment upstairs. FMV on teh date of transfer was $ 500,000 and donor basis was $ 255,000.

[Guest Taxed]

If the FMV is higher than the basis of the donor, then the basis for the recipient is the donor's basis (255K). If any gift tax was paid on this transaction add that to this.

[kcjenkins]

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax

http://www.irs.gov/uac/Publication-544,-Sales-and-Other-Dispositions-of-Assets--1

[rfassett]

If the asset was titled in the Corp name, then it is a distribution to the shareholders at FMV with gain being recognized by the corp and consequently the shareholders on a pass through basis. Basis in hands of the donee is basis in the hands of the shareholders which would be, in this case, FMV.

Here is a good summary:

http://www.borelassociates.com/topics/Distributing_Property_to_S_Corp_Shareholders.pdf

[Guest Taxed]

In the original post they said the S Corp gifted the property to the son. I don't think the son was a shareholder in the S corp.

[rfassett]

"and they are reporting the gift on their gift tax return" A corporation would not file a gift tax return nor would a corporation be able to gift to a non-charitable organization. If the asset went right from the corporation to the son, the son would pick up income at FMV and the corp would record expense for whatever the payment was being made. It does not sound to me that the latter was the desire. Broken down into its simplest element, the result I previously posted is the most likely - given what we know.

[Naveen Mohan from New York]

the objective of the client was to pass the property to his son whiel the client was still alive and this is his only son. The lawyer who handled the transaction has simply transferred the deed from S corporation to the son (son is not a shareholder). Does that mean client has to pick up the distribution equal to FMV- Basis.

This is lot of tax client will be looking at.

since taxable year is not over yet, is there any other option that will not generate tax. Should he ask the lawyer to reverse the transaction?

Thanks everybody for your help.

naveen mohan

[rfassett]

I could see this going either way on audit. One way, as I described above, includes two steps first a distribution to the shareholders followed by a subsequent gift to the son. Conversely, the asset could have gone directly to the son. Look for the Service to argue whichever way generates more tax. I know of no way to accomplish what you desire without paying the tax. Even asking the lawyer to reverse the transaction in wrought with danger. The Service could argue that this was an effort to evade tax in the worst case scenario or allow it to happen as, again, two separate transactions - one where the transaction incurring the tax takes place and a second transferring the asset back to the corp at FMV - so the tax was paid but the son ends up without the property. Not a likely scenario, but it could happen. You have here a text book example of why real estate should not be held in a corporation. Even if the attorney successfully reverses the transaction and son ends up eventually inheriting the S-Corp, the step up in basis at that point will apply to the shares of stock in the S-Corp but not the assets inside the S-Corp. I know I am not being much help to you, but sometimes there is not much that can be done. The planning ship on this transaction has sailed. You are left with reporting the compliance part of the transaction.

[jainen]

>>How do I handle this disposition of asset on S-corporation tax return<<

The corporation reports (and presumably passes through) $245,000 capital gain (assuming "donor basis" means the corporation's adjusted basis). In addition to the capital gain, the shareholder reduces basis in stock (and reports ordinary gain if there isn't enough basis). The son gets a basis step-up and a new depreciation schedule, and hopefully they all get a new attorney.

[Guest Taxed]

Was this a tax attorney or just a general practice attorney?

Should have consulted with a CPA prior to making the deal final.