Hello, can someone tell me what is the best way to transfer ownership of a property from a C corp to myself personally ?
I own 100% of the shares of the C corp. I own the property free and clear.
I understand about the tax implications, but right now just want to know the proper way to transfer ownership from the company to myself personally.
Just want to get some advice here before I speak to my attorney.
Thanks in advance.
The capital gain tax would be 200k.
To meet being a qualified dividend: You must hold it for
*When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.
The holding period is as follows:
Previous money taken from the corp would be dividends/ return of capital.
The rental income would go to the C-corp and if 60% or more of the gross income is from passive activities you run into Personal Holding Company rules.
If you plan to hold the property for a VERY long time. It may be better to convert to an S-corp.
It is good you are the sole owner of the corp. The issue may not really be where you are thinking. You can likely Quit Claim to yourself and not have too much of a problem but you may remove your liability protection under the C Corp and create a line right back to you from the Corp. Essentially making it very easy to pierce the shell of the C Corp to pursue you. Since you know what you did with the property in the C Corp, there should not be concerns of title defects of the owner and I assume the C Corp received title insurance. You may call the title agent who did your policy and simply ask if they will endorse you as a natural person with the QCD to be safe and see what they say. I think the bigger elephant in the room is when you send it back to yourself, does it also come with C Corp liablities that you may not want personally. If that is the case, you may need to do a more formal exchange, treating the transaction in an arm's length manner.
Just want to get some advice here before I speak to my attorney.
Thanks in advance.
I know you mention you understand the tax implications; however, I do find that I should state it here. It must be paid to you as compensation or as a dividend the taxable value of which the must be the Fair Market Value of the property. This is true even if your basis is zero. It may however be paid out in satisfaction of a loan to the corporation.
-Steven
It is simple as following what @Dion DePaoli stated.
THANKS both for the advice, appreciate it!
Steve, yes it will be paid as taxable dividend to myself at FMV of the property. I will pay taxes on the dividend and the C corp will pay taxes on any recapture of depreciation.
Ok, probably a very stupid question, but I suppose the date of the QCD will be the official date of the ownership transfer, correct? Are we allowed to legally back date the ownership transfer date to earlier this year given that I am the sole shareholder of the C corp that now owns the property?
@Mary Joe is the value of the C corp more than the value of the property? If so, trade the stock for the property and use a Warranty Deed. If warranty can not be made, use a Special Warranty Deed excepting out any issue (like any underlying mortgage). Providing warranty avoids the very slight issues mentioned and it will ensure that future title searches run smoothly without having to look up your corporate interests for such conveyance. :)
Thanks Bill. The property is owned by the C corp free and clear, no underlying mortgage.
However, I am not familiar with how it is done when you said: "trade the stock for the property". Are you saying me buying the shares of the C corp in order to own the property? I already own 100% of the shares of the C corp.
Also, the C corp has other activities besides owning the property.
Closely held C-Corps are a pain tax wise, you'll devalue the corp disposing of assets and have the issues Steve spoke of. You might consider buying it at market value and keeping it at arm's length. I can't tell what your tax issues will be but you can warrant title if you simply deed it out, reducing the stock value and having a taxable exchange. While you don't have a mortgage you may still take the property for any loans owing from the corp as full payment of any or part of the debt. You need to see your attorney and accountant to look at the options. Don't just deed it out without consultation, IMO.
What is your basis in the stock? That is another factor I would look at. Do not backdate it as the date that it is actually filed will be important.
This is why you NEVER hold real estate in a C-corp.
What is your basis in the stock? That is another factor I would look at. Do not backdate it as the date that it is actually filed will be important.
This is why you NEVER hold real estate in a C-corp.
@Steven Hamilton II Basis in the stock? I am not sure what that means, need to check with my accountant.
But from what I know/remember, the C corp has $100 in paid up capital, funded by myself when the C corp was formed. The property was purchased with cash from the retained earnings accumulated over the years in the C corp. Did I answer your question?
Yes, my accountant and attorney both advised to take the property out of the C corp, but still I would like to educate myself as much as possible rather than following their advice blindly without knowing a little bit more.
Thank you all for your feedback.
What is your basis in the stock? That is another factor I would look at. Do not backdate it as the date that it is actually filed will be important.
This is why you NEVER hold real estate in a C-corp.
@Steven Hamilton II Basis in the stock? I am not sure what that means, need to check with my accountant.
But from what I know/remember, the C corp has $100 in paid up capital, funded by myself when the C corp was formed. The property was purchased with cash from the retained earnings accumulated over the years in the C corp. Did I answer your question?
Yes, my accountant and attorney both advised to take the property out of the C corp, but still I would like to educate myself as much as possible rather than following their advice blindly without knowing a little bit more.
Thank you all for your feedback.
Mary,
Have you contributed to or loaned any money to the corporation? My other question is who advised you to use a C-corp? How did the property end up in the C-corp.
There had to be other funds as no business really starts with just $100. How else was it funded?
What are you going to do with it? Why do they say to get it out?
Might also do an LLC, have the C Corp as a member with you.......more later depending on what you want to do with it. Yes, the value should be more that the initial cash contribution. :)
@Steven Hamilton II The C corp was not formed purely to hold the property. It was formed to run other business activities. I did not loan the C corp any money. Earnings were accumulated (via other business activities carried on by the C corp) and the earnings or net profits of the C corp were used to fund the purchase of the property.
So just to clarify, you never put any additional money or took other money out of the corporation. That is not good for tax purposes. I was hoping there was another way to get the property out of the C-corp.
The corporation will have to recognize a gain/loss on the property. I found a perfect example to give. Assuming no other income and a 5% state tax rate.
I the property was purchased for 500k 10 years ago, and now there has been 200k of depreciation. Meaning adjusted basis of 300k. At sale/dividend Fair Market Value is $1million. There is recapture of 200k. There is then gain of 500k. This would result in tax of $278,841. Plus 5% to state: 35,000
Corporate tax total: 313,841.
The the shareholder that received the dividend would receive a dividend of $1 million. That they would pay 20% on. That would mean a capital gain tax of 200,000 PLUS state tax of 5% = 50,000.
Personal tax total: 250,000
Total tax on dividend/ distribution = $563,841.
This is why it is considered malpractice in some states to advise holding real estate in a C-corp.
Yes, I understand it's a real hit, @Mary Joe acknowledged this in her second post. If they were advised to put the property in the Corp, perhaps they might talk to that adviser about the difference if it's truly seen as malpractice :)
Probably stuck. Sold or transferred, tax due.
@Steven Hamilton II , I had a deal years ago where property was transferred into a subsidiary LLC, for some tax advantage (that was on the owner, not me, I wasn't involved in his tax issues). I believe it stayed away from the dividend as the Corp owned the LLC with other owners, staying in it's capital account, so there was no distribution. There was a tax attorney involved in it, not my thing. Is that correct?
Mary Joe might be living in that property, we don't know yet what the goal is and it may not be an issue. It seems she is aware of the tax hit.
But, as to the deed, she needs to use a warranty or special warranty for future title issues.
Hi from Florida, Mary Joe. From the title it appears that the property is in Florida. Keep in mind that, in addition to the transfer from the C-corp to you, you may encounter Florida's doc stamps tax. That is 0.007% of the deed transfer amount. In such a non-arms-length transaction, I am not sure how the State will want you to calculate it. I know loans, not tax law, so certainly chat with a CPA that knows what kind of tax hit you will take. I know several solid title agents down here that can also help. Let me know and I can refer you to someone that is Florida-based.
Correct, I never put any additional money into the C corp or took money out of the C corp. I can understand if I had put additional money into the C corp, then some or all of the transfer can be deemed to be a return of the additional money I loaned the C corp. But I don't understand what are the tax implications if I had taken money out of the C corp before.
The corporation will have to recognize a gain/loss on the property. I found a perfect example to give. Assuming no other income and a 5% state tax rate.
I the property was purchased for 500k 10 years ago, and now there has been 200k of depreciation. Meaning adjusted basis of 300k. At sale/dividend Fair Market Value is $1million. There is recapture of 200k. There is then gain of 500k. This would result in tax of $278,841. Plus 5% to state: 35,000
Corporate tax total: 313,841.
The the shareholder that received the dividend would receive a dividend of $1 million. That they would pay 20% on. That would mean a capital gain tax of 200,000 PLUS state tax of 5% = 50,000.
Personal tax total: 250,000
Total tax on dividend/ distribution = $563,841.
This is why it is considered malpractice in some states to advise holding real estate in a C-corp.
Thanks for the example, yes that's my understanding too about the tax consequences both at the C corp level and me personally.
Question about the dividend though. I got confused when you mentioned that the dividend to the shareholder "would mean a capital gain tax of $200,000". Wouldn't the shareholder pay dividend tax only? I wasn't told that there will be capital gain tax that the shareholder has to pay also upon receiving the dividend from the C corp.
I would assume any capital gain tax would be at the C corp level ONLY upon disposition of the property, since it is not a LLC, no capital gains would flow to the personal level.
@Steven Hamilton II @Bill Gulley
Thanks for the feedback Bill. Long story why it was set up in a C corp, but I am glad it is being transferred out of the C corp now. The property is worth very little but I need to clean up the mess before it snowballs into something even worse.
Steven, I would assume the dividend would be treated as ORDINARY dividend subject to ordinary income tax rate, correct? I hope I don't need to worry about whether to classify the dividend as ORDINARY dividend vs QUALIFIED dividend.
Thanks !
Might get an appraisal in the as is condition, tell the appraiser that the reason for the value is for tax purposes, it may come in a little lower.
My thinking was that putting it into an LLC avoids distributions to you and booked in the LLC as a contribution. You still have the corp tax and recapture of depreciation since you're changing the basis out of the corp but might save you some money. If it's no worth that much might take the hit and move on. :)
Thanks Bill. I am trying to understand how to record the transaction if I am to put the property into an LLC.
The LLC will be a separate entity that I will set up. So after transferring the property from the C corp to the LLC, my books will look like this?
LLC's books after the transfer, assuming fair market value $100K:
Asset (ie the property) = $100K
Capital contribution or Investment from C corp = $100K
C corp's books after the transfer will then show:
Property = $0
Investment in LLC = $100K?
Say if I am to rent out the property, then the net rental income will flow back to the C corp ?
I like the idea since this way the C corp will no longer have to distribute the property to me personally, and I no longer have to pay tax on the $100K dividend.
I wonder if IRS will challenge such a transaction or if there are any other tax consequences I am not aware of?
Oh wait, what happens when I have to sell the property one day? The LLC will record a gain, the gain will then flows back to the C corp, and the C corp will have to distribute that to me personally as dividends.
So we are back to square one?
I think if I transfer the property from the C corp to the LLC now, I can postpone paying tax on dividend for the time being, but eventually when the LLC sells the property, I will have to pay tax on the dividends anyway, probably more if the property appreciates in value.
The capital gain tax would be 200k.
To meet being a qualified dividend: You must hold it for
*When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.
The holding period is as follows:
Previous money taken from the corp would be dividends/ return of capital.
The rental income would go to the C-corp and if 60% or more of the gross income is from passive activities you run into Personal Holding Company rules.
If you plan to hold the property for a VERY long time. It may be better to convert to an S-corp.
Steve is real handy to have here, isn't he?!
In the LLC you'd have a different tax election, can't say what would be best for you, but S-Corp or partnership. You can manage the the property and the LLC, charging fees to reduce income to the Corp partner and the tactic is to reduce the capital account of the corp in the LLC and increase the account of the managing member over time. The "property ownership" is in the LLC and over time you are gaining "property ownership" by increasing your interest in your capital account. This is accomplished in the Operating Agreement, not by the transfer of title. When you dispose of the property, costs of management our other amounts as accrued are paid first, say you sold for 100k later on, the LLC is paying management and any other fees first, say 40K then, 60k is the profit to distribute. At that point if partners agree they can split any property sales proceeds. You can end up with 30K at that point. The corp partner gets 30K from the sale.
Like any other LLC, you can have a money partner making a contribution, the other earns ownership over time as well as income through management.
Yes, you have the accounting entries correct @Mary Joe .
As I recall, the tax attorney at that time was saying that earning interest in the LLC by the individual should be at or less than 10% and income paid to them was on a sliding scale, 20% in year one and increased over time until it was half. As I recall this was to keep from issues of just giving the property or LLC interest away initially as a sham transaction, the interest earned by the individual needs to be reasonable over time.
Again, use a warranty or special warranty deed, we have a title attorney from FL here and he too has voiced concerns and issues with the over use of quit claim deeds as posing problems in the chain of title. I'd @ him, but we aren't connected, maybe Steve can, as a moderator I think he has more options/functions available to him.
Bring this up with your attorney and tax adviser, the passing of interests is in the Operating Agreement, not as a title transfer in the LLC. :)