Real Estate in an S Corp

[Randall]

Client just informed me he elected S Corp status for his SMLLC which has rental real estate (effective 1/1/17).  He has two other SMLLCs with S election which is ok.  I thought I had previously advised him not to elect S status for the SMLLC holding the real estate.  Can he back out of this and what procedure is needed?  Assuming he remains with the S status, how will the 8582 look with the previously Sch E unallowed losses on 8582 and the new pass thru losses reported on 8582 as a new activity?

 

[mircpa]

Under both circumstances, S corp or Sch E, Form 8582 will needs to be opened to flow through allowed & unallowed rental losses. I don't think it would change nature of treatment of passive losses for both situations. I believe 8582 is tied to an individual.

[Randall]

6 minutes ago, mircpa said:

Under both circumstances, S corp or Sch E, Form 8582 will needs to be opened to flow through allowed & unallowed rental losses. I don't think it would change nature of treatment of passive losses for both situations. I believe 8582 is tied to an individual.

Yes, but I was wondering about the specifics on the 8582.  Currently, from Sch E, there is Property A, B, and C.  Next year there would be the 1120S K-1 and this loss would pass thru to the 8582 as a new activity.  Would it be a total of the 3 properties, or 3 additional properties?  Would it be merged with the existing 3 properties that came from Sch E in the previous years?  Thinking ahead when a property might be sold, freeing up the unallowed losses.

 

[Randall]

I hoping he can just retract the S election.

 

[mircpa]

I don't think retracting S is even needed. If Sch E has 3 properties then you would have 3 entries for unallowed losses under 8582 & follow same route if rental property losses are coming from S corporation, if there are multiple properties. Then it is much easier to knock off capital gains with prior unallowed losses when each property is sold.

[Lee B]

I think it would be easier to deliberately terminate the S Election.

Suggest you review the reasons that terminate an S Election.

[Abby Normal]

If you end up keeping the S corp and there are passive loss carryovers for that property, just move those losses to the K1 input of the 1040.

With an S corp, the losses will have to clear the stock basis hurdle before they even get to the passive test.

And he should open a separate bank account in the name of the s corp for all the transactions to be run through.

[Randall]

13 minutes ago, Abby Normal said:

If you end up keeping the S corp and there are passive loss carryovers for that property, just move those losses to the K1 input of the 1040.

With an S corp, the losses will have to clear the stock basis hurdle before they even get to the passive test.

And he should open a separate bank account in the name of the s corp for all the transactions to be run through.

Another reason not to have elected the S status. I wish he would have asked me first.  Ha. 

[BHoffman]

I would terminate the s election.   Here's a how-to:

http://info.legalzoom.com/terminate-scorp-election-revert-llc-23367.html.    

[Randall]

12 hours ago, BHoffman said:

I would terminate the s election.   Here's a how-to:

http://info.legalzoom.com/terminate-scorp-election-revert-llc-23367.html.    

Thanks.

 

[michaelmars]

he must terminate the election.  Assuming the property has a mortgage then he has basis to deduct loses in an LLC. Not so with an S corp. even if he personally guarantees it.

also if he is in for the long haul eventually he will refi.  with an llc he just puts it in his pocket. with an S corp it must stay in the corp or taxes are due.