1120S to Schedule E

[Roberts]

Client has an 1120S where the only thing left in it is a building which he is renting out to someone. He'd like to disband the 1120S and move the asset to a Schedule E. Is there anything special I need to do to make that happen? I'd just roll over the depreciation as it is I'm guessing. Other than finalizing the 1120S, is there a form to declare this move?

[Lee B]

You have a potentially big issue here, because when the bldg is distributed to the owner from an S Corp, IRS rules require it to come out at FMV,

which if the bidg has been in the S Corp for awhile, more than likely would trigger a large taxable gain.

In the past I have had to head off several clients from setting up S Corps to hold rental property for this exact reason.

[Roberts]

The purpose of the S-corp wasn't to hold rental property, that was sort of an accident that happened 20 years ago - long before me.

[Roberts]

There likely wouldn't be much of a gain if sold to the client but I don't see the purpose of doing it.

[TaxGuyBill]

As was mentioned above, it is distributed (essentially 'sold') to the taxpayer/shareholder at Fair Market Value.  That is required.

The individual person is a separate taxpayer/entity.  They will restart depreciation using their 'purchase' cost.

 

After 20 years, and factoring in 20 years of depreciation, do you really think there won't be much of a gain?  That would be ideal, but I suspect the gain due to the depreciation could be large.

[mircpa]

I believe if property has not changed hands why not move property to 8825 under 1120S, rental income/losses will get automatically taken care of.

[Terry D EA]

1 hour ago, mircpa said:

I believe if property has not changed hands why not move property to 8825 under 1120S, rental income/losses will get automatically taken care of.

Easiest way.

[Roberts]

12 hours ago, mircpa said:

I believe if property has not changed hands why not move property to 8825 under 1120S, rental income/losses will get automatically taken care of.

It's already on there as he's been renting it out for years.

He just really wanted to get rid of the 1120S for some reason - don't know if it's because he thinks my bill is too high? It isn't. He's a really nice guy, getting old and barely doing anything anymore as far as work. He's not in the best financial shape and his kids are sucking him dry. Several years ago he about broke down crying in my office when I told him he owed taxes because of a large IRA distribution.

[EricF]

The recognition of gain to the corporation on the distribution of property from the corporation is required by Section 311(b), even if the corporation is an S corporation.  If he doesn't want to trigger the gain that would be passed through to his 1040, it's better to leave the property in the corporation.  If he thinks the S corporation is costing him too much in fees, compare that to the tax on a gain on the difference between fair market value and adjusted basis.

[Abby Normal]

18 hours ago, mircpa said:

I believe if property has not changed hands why not move property to 8825 under 1120S, rental income/losses will get automatically taken care of.

That's where it's supposed to be. But I've inherited S corps that just rent buildings and it's been on page 1.

But this doesn't solve the problem of having to pay Roberts exorbitant fee for preparing the 1120S.

[Terry D EA]

I think I would calculate the gain on the sale of the property when it changes hands and then show him what the fees are for the 1120S. This way he should be able to see the fees are well worth it. Especially, if he doesn't have the funds to pay the gain. If this is all the 1120S is used for, then the fee shouldn't be very much. No balance sheet, no M-2 or M-3 just 8825 and 4562. 

[Randall]

Another option would be to actually sell the property to a 3rd party.  Loses rental income stream but has lump sum cash on hand.  May get a break on long term capital gains too.  Close corp, final 1120S, final 1120S fee.

 

 

[Roberts]

7 hours ago, Randall said:

Another option would be to actually sell the property to a 3rd party.  Loses rental income stream but has lump sum cash on hand.  May get a break on long term capital gains too.  Close corp, final 1120S, final 1120S fee.

 

 

I have another 1120S who's owner died and the wife inherited the business. We'll close that business when they sell their primary asset so that she can take advantage of the share price bump up in cost basis.