Tax issues on corporate owned property

12 Replies

Hello all,

I have a dilemma involving tax issues on a property I own.

In 2010, I purchased a single family residential property. It was purchased by my (solely owned and managed, I have no other employees or officers) Tennessee C-corp, so the deed is titled to my business. In 2011, I moved into the home to renovate it. One thing turned into the next and here I am, still living in it in 2018. Within the next year or so, I would like to sell it and I don't have a clue of the tax implications.

My c-corp is still active with the state, however I have not conducted any other business under that name for years and no longer have a bank account under that name, though I suppose I can always open a new one. I have lived here since 2011 as my personal primary residence, so going on 7 years, however the deed is titled to my business.

How should I proceed when I am ready to sell this property? Should I sell this property under the currently business deed-ed name, pay capital gains taxes on the sale, transfer the funds to my personal account, and then close down the business?

Should I quit claim the deed to my personal name or spouses name to first the deed out of the business, and then sell it? 

Is there a way to way to do the 1031 deferred tax deal, where I could sell this property, defer the taxes by purchasing a different one? Is this possible only under the current business and not a newly created one? (The deed is titled to a Tennessee corp, I would like to move Florida and create a new corp, dissolving this current one.

Does anyone have any suggestions on what to do? What is the best route to proceed?

Thank you for your time.

1031 is for investment property not your personal residence. If you maintain the ownership under the current name, move out, then lease it for some time, you could 1031 into another investment property.

@Jake Hancock Don't pay attention to @John Thedford , he just got up on the wrong side of the bed today and is grumpy (Although since he probably woke up with gun in hand I'd better be nice :).  He's absolutely right - 1031 is only for investment not primary residence.  However you seem to be in a tweener dilemma.  

If you owned the property you could sell and take advantage of the primary residence exclusion to turn most if not all of the gain tax free.  But the deed is actually in the name of your C corp.  My guess is that the C corp has it's own tax id and has filed it's own taxes so it can't be a disregarded entity.  

But that then begs the question of, if the C corp is the tax payer and not you did the C corp own that property with investment intent.  If so then it owns a piece of investment property and it could actually do a 1031 exchange.  To be used for investment use I would think things like declaring the residence as officers comp or documenting it's use for corporate business use (retreats, parties, meetings, part of your compensation package etc).

You need to ask your acct.  Sometimes you get lucky and the "if it doesn't work here is must apply here" doctrine will fly.  Or  you may just not qualify for either in which case the industry term is SOL.

This stays under my pillow....

@Dave Foster Thank you for your response. I understand that this situation isn't ideal, I shouldn't have made this my primary residence while it was deeded to my c-corp. The deed is in the c-corp name. It does have its own tax id and I have filed its own taxes, so it is it's own entity.

I purchased this property (I, as the sole officer of the c-corp) as investment property, for cash from a Fannie Mae auction. My end goal was to flip this property and sell it or drop it on a vacation rental program once complete. Since I was small time and was living 8 hours away, I moved to this property to accomplish that. The only thing that really changed was that 1) I was living here and 2) my renovation took multiple years longer than the initial plan due to changing circumstances.

If I sold the house today, and was not 1031 eligible, as it sits deeded to the c-corp, what would my tax liability be? Would it be 15% capital gains taxes on the total sale amount? Or the total sales amount less the initial purchase price? Do I add or substract the renovation costs, or do nothing with that amount?

If I transfered the house deed to myself or my spouse, what tax liability exists in this case? Would the c-corp pay capital gains on the market value of the house for "selling" it to myself? And then from there, I personally owe taxes on the home if I sell within 2 years of obtaining the deed in my personal name?

A little more info: This house was purchased for $40,000 in 2010. I will have put around $90,000 into the renovations when completed (4-6 months) and it will be all finished up.

@Jake Hancock , You won't pay tax on the basis of the property which is going to be the purchase price plus improvements minus depreciation all subtracted from the sales price.

But corporations are funny animals and your accountant needs to answer the liability question.  There's reason why the "C" in CPA stands for certifiable (OK maybe not but it makes for good accountant humor)

Wow you have a mess on your hands, 

1) you should never own rental property in a c-corp

2)  you should always have you primary residence in your own name.  

This is too complicated for me to help you unwind on a thread, private message me if you want and I will send you my contact, because I would need a lot more info from you to see if I can help, or at least point you in the right direction.  

I must ask. Why did you stick your property into a C Corp?

@Logan Allec I wish I could answer that question. When I purchased the property, I purchased it with funds from my C-corp bank account. The original purpose of this property purpose was for flip/investment purposes. I was ignorant to the dilemma I would be facing now. Obviously I shouldn't of had it deeded to my C-corp. Now, I'm trying to figure out how to resolve this mess.

I think this goes to the file above our heads  as to why we got into this situation.  (a name of an artist)  Please have all future investments of a real estate nature in a S corp so they pass go and collect the $200

@Jake Hancock

Seems like you are in a sticky situation.

If you deed the property from the corporation to your name; this may be deemed a distribution. The C-corp would report gain from the difference of FMV and adjusted basis. Adjusted basis is purchase price + improvements less depreciation.

Corporate tax rates for 2018 is a flat 21% at the federal level. You may also be subject to state taxes.

This distribution may also be considered a dividend paid by the corporation to you. You would then therefore pay income on this. This part might be slightly different if its considered a complete liquidation.

The only good thing about this scenario is that your property would get a step up to basis to its current FMV and if you start depreciating it - you would factor in the new basis for depreciation...

Still you likely lost the $500,000 gain exclusion...
You may need to reach out to a CPA to double-check if there is any case law for the IRS to provide relief in your case...

Please let us know what your CPA says; i'd be interested to hear what he says!

Also - how was the mortgage interest and the real estate taxes from the home get reported on the tax returns?
Were you listing it as deductions on Corporate return? Did you take it as itemized deductions on personal return?

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