My family has a large portfolio of properties owned in an S-Corp (LLCs didn't exist when they started investing!) and we are now wanting to start transitioning ownership of the portfolio to the next generation. Our CPA has advised that it is more advantageous to hold RE in LLCs rather than continuing with the S-corp. To avoid incurring a large tax liability they have proposed a detailed entity restructure including a S-Corp inversion to tax partnership. Has anyone else ever dealt with this scenario? A simple solution is to divide ownership of the exiting S-Corp however then we are still left with all the assets held in an S-Corp which to my understanding is not as flexible as ownership in an LLC. Any advice from those who have done this transition before would be greatly appreciated!
Call title and (in Oregon) do a Bargain-and-Sale (ie no money or consideration) deed. Probably simplest and cheapest, quickest. However, call your CPA first for effects and how to time it.
I didn't know S-Corps pre-dated LLCs? Realize they serve 2 diff purposes:
1) LLC is to limit a claimants recourse to your assets and passes thru income to the end entity
2) S-Corps are the end entity and are used to reduce taxes (like FICA) and W-2 amounts by providing more generous benes (like retirement contributions) to "employees" as long as all are treated equally.
DISCLOSURE - AM NOT A CPA OR TAX PROFESSIONAL.
Is it possible? Yes.
Is it best? That's a question for your advisors. It really depends on the facts, circumstances, and goals of the current owners (presumably an older generation).
I think you are definitely on the right track to not have property in the S-Corp.
If you have not already retained a lawyer accountant to help you out, I would highly recommend you contact Mark Kohler's office at KKOS Lawyers/Accountants.
He/they have a ton of good youtube content to help understand entity structuring and the tax ramifications also. We (3 partners and I) used them to set up our LLCs that are made up of our SDIRAs and SOLO401Ks and were VERY happy with the service and knowledge. They expertise is legal and accounting primarily for RE investors of all kinds.
Your question cannot be answered without a thorough hour-long (at least) discussion of your business and your family's overall financial situation, current and future, as well as examining your tax returns and financials.
Any other answer would be akin answering "should I stop my usual eating habits and switch to ____ diet?"
Hopefully your CPA is competent in tax planning and real estate and knows your situation very well, so he advises you accordingly. If you're not sure, then it's worth 2nd and 3rd opinion, but not in an online forum.
While I appreciate you taking time to respond I wanted to clarify, I am not asking advise if I should do this, I am asking if anyone out there has ever done an S-Corp to tax partnership inversion. I am told by my lawyer that it is not uncommon. I also believe I have a reputable CPA as I use The Real Estate CPA group (Brandon Hall) and they have helped draft my entity structure. Many variables have been considered but I was hoping to hear from someone who has actually gone through the process.
Originally posted by @Shannon Kiefhaber :
I also believe I have a reputable CPA as I use The Real Estate CPA group (Brandon Hall)
Yes, you're in good hands
Interesting I just searched your "inversion" technique. Sounds relatively straight forward.
Drop old S Corp underneath new S Corp, then
make Q Sub election for Old S Corp, then
convert Q Sub to LLC to which you are then admitted.
Is that it?
The old S Corp shareholder's ownership interest in new LLC is still indirectly trapped in S Corp solution, but your LLC interest is not?
I've worked very closely over the last 10 years or so with the other type of corporate inversion so I was interested what this other "inversion" was all about.
Always get a second opinion from another CPA when in doubt.
Most people start with LLC and then at some point convert to S-Corp tax filing status when start making good money to reduce paying so much self employment tax, etc. So not sure what the benefits in switching.
@Shannon Kiefhaber lucky problem.
There will be significant tax consequences. We've done it with clients however I will warn you to get a second opinion. Prior to that firm opening they had zero tax experience. You'll want someone with actual tax experience and knowledge. Not half baked incorrect marketing tactics that mislead.
Consider a meeting with @natalie Kolodij
@Shannon Kiefhaber Generally, you cannot get property out of a corporation (or S-Corp or LLC taxed as S-Corp) without paying capital gains tax (and depreciation recapture), as the transfer is considered a deemed sale. The inversion you describe sounds like the properties will still be trapped in an S-Corp structure, so no benefits of having them in an LLC.
By the way, the major benefit of having real estate in an LLC is that you get to include mortgage debt as part of your investment basis, which means that rental losses are not limited by your investment in the company. Your rental losses can be limited by other circumstance, however.
Since the portfolio has been in your family a while, the basis issue may not be a problem for you.
After saying this, I'm sure your tax advisors are aware of these issues and have planned accordingly. Also, there may be other issues they are trying to resolve that is more important to the family, than just the taxes.
I appreciate everyone's comments. Just to close the loop I will not be making any changes with the properties in the S-Corp as there is not a good solution. I will be gifted ownership in the S-Corp and begin to reposition properties by selling the ones in the S-Corp and buying new ones in a new LLC. I hope this is a good lesson for anyone else in a similar situation. Don't buy property in an S-Corp!!
Is there any opportunity to inherit the entity instead? If you move the properties all out in that same year that you acquire the stock in the S-Corp by inheritance, thereby receiving the step up, you will be able to net the gains from inside with the loss of the stock basis. That would be the "tax free" (about tax free) way to get them out of there.