How to transfer a property from s-corp to LLC

Question

I know, I know..holding a rental property in s-corp is generally a bad idea.  But it was done this way by my parents.

So my family members' s-corp holds a rental property.  And after researching for some time, I realized that it was a bad idea.

How would you fix it to put it into a LLC?

Some details-LLC will have same members, loan will be paid off.

I briefly talked with a CPA and he suggested that we sell the property to a new LLC. done.

Is it going to be that simple?

John Hyre · Answer

Liz,

We have fixed any number of messes created by those people.  They do not seem to really look at a client's situation.  For example, we have seen multiple instances of C-Corps set up that made no sense when one looks at the clients' financials, returns, businesses & goals.  We have also seen them set up 401k's for client's who did not have and did not plan on having qualifying ("earned") income.  They seem interested in selling as much as possible via creation of the "fanciest" structure possible (i.e. - most expensive) and once they have the payment, follow up deteriorates dramatically in terms of responsiveness and quality.  I post this publicly - they are welcome to sue me for defamation, the discovery process would be fun.

Steven Hamilton II · Answer

Its a simple transfer; however, you will have to report the sale at FMV. I recommend an appraisal to prove value. It is deemed a sale at FMV even though you are just transferring it out of the S-corporation.

John Lee · Answer

@Costin Iorgulescu

I will check these links and also talk to a CPA before I do anything.

Thank you.

John Lee · Answer

@Steven Hamilton II

Thank you for your input.  I will consider getting an appraisal.

@Joe Tomko

I guess these options will work but we really want to keep everything simple. Thank you for the recommendation.

Costin I. · Answer

Transferring the property out of the S Corp, the IRS treats this transaction as a “sale. - as detailed in Owning Rentals in an S Corporation Might Be a Costly Mistake: Here’s Why blog. You need to consult with a CPA experienced with real estate transactions and options before any move in order to avoid a big tax bill.

Search for how to transfer real estate out of S-corp and you'll find many answers like this or this - but the main idea is you need specialized help.

Joe Tomko · Answer

Sorry for the confusion.  I didn't realize that my daughter would be confused with a daughter LLC.  A single member LLC has a high rate of IRS audit. My daughter is a 2% shareholder in X LLC, which greatly reduces my audit risk.

X LLC wholly owns x LLC, y LLC, & z LLC, which are disregarded entities for tax purposes.  These are "daughter LLCs" as they are offshoots of the parent, X LLC.

x LLC, owns property x.  y LLC owns property y.  z LLC owed property z.

I don't know that a trust needs to be temporary.  Will you continue to use the S Corp after moving the property?   If not, I think converting it to an LLC is a good option.  Call Anderson and get a free consultation.  Send me a PM and I can call you to discuss further.  If you go the trust route, they can help you do it anonymously which will also avoid triggering the due on sale clause of any outstanding mortgage.

Jerry W. · Answer

@Joe Tomko, I am confused, how can an LLC be your daughter's if it is wholly owned by a holding company?  The daughter LLC owns property you say, but your daughter does not own the LLC?  I am unable to understand what you are implying or how it in any way it could possibly help get a property out of an S Corp without causing a taxable event.  As I understand the rule of transferring into a trust, you cannot have the mortgage called if you put property into a TESTAMENTARY trust.  It has nothing to do with creating a transfer exempt from taxes.  Could you please explain more?

Joe Tomko · Answer

I see two options.  Put it into a trust with the beneficial interest of the trusty being the LLC.  You could also convert the S Corp to an LLC, but you also need to figure out how to tax the LLC.  LLCs can be taxed as an S Corp, a C Corp, a partnership, or as a sole proprietorship.

I own (my daughter owns 2%) a holding company LLC taxed as a partnership.  This holding company fully owns daughter LLCs that are disregarded entities.  These daughter LLCs hold property.  This gives me asset protection and anonymity.

I suggest you contact Anderson Advisors in Cheyenne, Las Vegas, or Tacoma.  I have no affiliation with them, but i utilize their services.  I'm not a lawyer so i give no advice other than to consult with them.  They have a ton of videos on their website and on YouTube.

I hope this helps.

Joe

How to transfer a property from s-corp to LLC

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