Getting property out of an S corp without a taxable event ?

Question

I a seeking advice on getting my property out of an S Corp and into a regular LLC without triggering a taxable event.

We do not have any basis in the S corp with which to take distributions.

Ashish Acharya · Answer

The distribution is going to be taxable event. Depending when you bought the asset, you can report the sale at discount to avoid the cap gain but there will always be recapture even if you distribute at historical cost (basis). Again, this is just one way and only works for recent transactions. If your asset has appreciated a lot, you cannot defend distribution at the historical cost.

Greg O'Brien · Answer

@Patricia Pretto this is a Type of “F type” reorg. We do them frequently (not in your exact scenario). The steps listed above have about a dozen variations. IMO it has to be worth it for you. The reorg will be quite costly with legal/tax advisors, so you’d need to weigh that out vs tax savings.

Patricia Pretto · Answer

Very interesting!

This is the only glimmer of hope I've heard so far. Thank you, I'll dive into this some more.

Eddie L. · Answer

*Not CPA*

Depending on your end goal....The article below mentions two methods of transferring the property from the S Corp to a LLC tax free, but I assume you want the LLC to be owned by you and not the S Corp... Nonetheless

https://gallerosrobinson.com/i...

1. Method 1

a. Set up a new S Corp ("Newbie").

b. Exchange all current S Corp ("Oldie") shares for the Newbie shares.

c. Newbie makes an election to treat Oldie disregarded for tax purposes.

d. Newbie forms a wholly owned LLC under it.

e. Newbie merges Oldie into LLC, where Oldie is merged out of existence and LLC is the survivor.

2. Method 2

a. Current S Corp forms a wholly owned LLC under it.

b. S Corp contributes the property into LLC.

Greg O'Brien · Answer

@Patricia Pretto you may want to look into some inversions or corporate reorgs (F type). These are complex and the costs of CPAs/Lawyers could outweigh benefits.

As said above, distro of property has to be at FMV unfortunately

Jake Wiley · Answer

Agreed with @Ashish Acharya - The additional facts make this a challenge to the point that creative solutions might raise more flags than leaving it as it is. I am actually in the same boat! Have a legacy S Corp with 1031 that I am stuck as well.

Patricia Pretto · Answer

Thanks for your input. This asset has appreciated significantly and it does have debt...I think we will just have to hold it or pay a huge tax bill.

Patricia Pretto · Answer

Thanks for your reply. We bought the original asset years ago and have done 3 1031X's throughout the years, so as you stated, I don't think this will work for us.

Jake Wiley · Answer

A potential idea would be to transfer your property from the S Corp to the LLC at its S Corp book value. If there is debt involved, you'd need to find a way to get that transferred as well.

Getting property out of an S corp without a taxable event ?

Getting property out of an S corp without a taxable event ?

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