Tax Implications of Quit Claiming to Other Entities

4 Replies

I was originally posting this for my parents, but the more I think about it, the more I want to know for myself.

My parents have around 15 or so rental properties owned by a single S-Corp which also owns a non real estate related business. An attorney recommended that the rentals be transferred into 2-3 LLC's, away from the non real estate related business.

My parent's accountant is telling them that the S-Corp must sell each rental to the LLC's at full market value and that capital gains taxes must be paid.

Is this true and is there a way to transfer properties between entities without paying capital gains? Could the properties be quit-claimed? I've quit-claimed properties to other entities before without thinking about the tax implications.

Originally posted by @Matthew B. :

I was originally posting this for my parents, but the more I think about it, the more I want to know for myself.

My parents have around 15 or so rental properties owned by a single S-Corp which also owns a non real estate related business. An attorney recommended that the rentals be transferred into 2-3 LLC's, away from the non real estate related business.

My parent's accountant is telling them that the S-Corp must sell each rental to the LLC's at full market value and that capital gains taxes must be paid.

Is this true and is there a way to transfer properties between entities without paying capital gains? Could the properties be quit-claimed? I've quit-claimed properties to other entities before without thinking about the tax implications.

 Matthew,

No unfortunately not. This is why the properties never should have been acquired by their S-corp.  That is the nature of the corporation itself ANY transfer from it is considered a sale. This triggers Capital gains AND recapture of any depreciation.

How long have they have the properties? How much appreciation has there been?

Creating a new entity for the other business is probably a better option.

@Steven Hamilton II  

They've acquired the properties over the last 6-7 years or so. I'm really not sure about the appreciation, but all of the properties were purchased at a deep discount.

Is this something that is specific to S-Corps and Corporations? Does it work the same way with LLC's, whether they be single member or multi-member?

This is a big issue for corporations. This is why advising that can be considered malpractice in many places.
Feel free to give me a call and I'll take a couple minutes to explain your options. 

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