Tax strategies--sale of apt complex (S Corp) - Posted by Kevin

Posted by Jimmy on May 23, 2006 at 10:12:49:

  1. the salaries you guys have colelcted are payments from the S Corp your personal services. This is W-2 income, subject to the full array of payroll taxes and income taxes. the gain from the sale of a property will (almost always) be capital gain. this gain has nothing to do with personal services. rather, it is a benefit of ownership.

  2. as for the mechanics of the 1031… you ask some wonderful questions. and I am no expert. I know enough to mention the idea. you really want to talk to a CPA or tax atty who has transacted many of these deals. No point in me trying to dream up a way of doing this, when there are experts out there who already know (and know how to do it right!)

  3. as for what constitutes “like kind” the rules are very liberal. an office tower for a working ranch is ok. a 4-plex would be fine.

Tax strategies–sale of apt complex (S Corp) - Posted by Kevin

Posted by Kevin on May 22, 2006 at 22:15:36:

Greetings board. I hope to hear anyone’s thoughts on tax strategies for selling a 28 unit apartment complex held by an S Corp (comprised of family member shareholders–siblings). The S Corp holds other properties as well, which we do not plan to sell in the near future. The 28 unit building has been in the family for decades and has tons of equity. We’re anticipating a significant tax hit, but have not explored the issue yet with our accountant.

I would love to go into such a meeting with some creative ideas or insights shared by this board. At present, the building probably has a value in the $1.5 to $2.0 million range. Obviously, the dollars at stake warrant some very careful tax planning.

Please excuse my ignorance here. We have never sold any of our properties and therefore have never had to deal with this type of issue.


Re: Tax strategies–sale of apt complex (S Corp) - Posted by Tracy D. Weaver, JD/MBA

Posted by Tracy D. Weaver, JD/MBA on May 24, 2006 at 08:05:39:

When you have multiple owners of an S-corp and the desire is for one or all of the owners to sell and go their separate ways, a few issues arise.

There are different options available, but a 1031 exchange is the best option if one wants to go right back into real estate and can find a property in 45 days, they are simple and relatively inexpensive (my firm only charges $199.00 for example)

To do a 1031 exchange, one must exchange into the same ownership entity as they are coming out of, in your case the S-corp. So anyone wanting to do a 1031 will have to keep the S-corp alive, and do it with the other siblings. This may or may not be desirable. If this was a partnership or an LLC (the best vehicle to hold property in) then it would be simply a matter of distributing each of your interests out of the entity BEFORE you sell, then you each could do what you wanted.

There are ways to divide up the S-corp so you would each have separate identities going forward, but like anything would take a little time.

Re: Tax strategies–sale of apt complex (S Corp) - Posted by Jimmy

Posted by Jimmy on May 23, 2006 at 07:39:47:

this is a good problem to have.

the building should be almost fully depreciated by now, except for recent improvements which were capitalized. so almost the entire sales price will be taxable. there may be some recapture income, but I suspect most of this is long term capital gain.

  1. have your CPA do a tax projection for you. he should be able to give you a pretty accurate guess of the LTCG/recapture stuff.

  2. LTCG rates are low, by historical standards.

  3. if you and your sibs cannot stomach the tax hit this year, you have a couple of ways to defer it. a 1031 exchange or an installment sale. the exchange is a little complicated, and you definitely want a pro to act as intermediary. basically, you identify a new investment property and reinvest the sales proceeds. if you jump through all the hoops, you defer the gain.

the Installment sale is pretty simple. you seller-finance the deal. each payment you get will have three (or 4) parts: interest income, capital gain, recapture income(if any) and return of basis (if any).

Re: Tax strategies–sale of apt complex (S Corp) - Posted by Kevin

Posted by Kevin on May 25, 2006 at 16:03:22:


Thanks for your insights! I think I understand your point regarding the 1031, but I want to make sure. Are you saying that in order to take advantage of a 1031 exchange, the S Corp itself would need to purchase the new property? In other words, I won’t be able to take my cut and find a new property in my own name (or the name of an LLC I would form) and take advantage of the 1031, correct?

What if I form an LLC right now and transfer my S Corp shares to the LLC? Assuming my siblings have no problem with that, would that work? My LLC receives proceeds from the sale of the building and then finds a new property within 45 days. Of course, that raises the question of what happens to my S Corp salary if a LLC takes over my shares…any problems there?

I really do appreciate your insights. This is all very helpful–and kind of fun to analyze!


Re: Tax strategies–sale of apt complex (S Corp) - Posted by John K Haslach, CPA, MST

Posted by John K Haslach, CPA, MST on May 23, 2006 at 11:14:26:

I have not looked at this in 10+ years, but I believe there are special rules if an S Corp makes an installment sale and then liquidates. Have your CPA check it out.

Re: Tax strategies–sale of apt complex (S Corp) - Posted by Kevin

Posted by Kevin on May 23, 2006 at 09:13:45:


Thanks very much for your post. You’re right, this is a very good problem to have!

I do have a few follow-up questions, if I may? First, we all draw salaries based on our contributions to day-to-day operations, but will likely be splitting the proceeds of this sale equally. Are you saying that the proceeds likely would be taxed as long term capital gains rather than as personal income? Second, regarding the 1031 issue, one of the main purposes of this sale is to reduce our hands-on involvement in day-to-day operations and enable us to perhaps start going our separate ways. Personally, I would like to reinvest my portion in another income-producing property/ies. Would a 1031 require reinvestment by the company rather than the individual shareholder? And, would a substantially smaller complex (say, a 4-plex) constitute like-kind? Probably not, but I’d love to hear your thoughts.

Thanks again!

Re: Tax strategies–sale of apt complex (S Corp) - Posted by Tracy D. Weaver, JD/MBA

Posted by Tracy D. Weaver, JD/MBA on May 26, 2006 at 09:46:58:

You are correct as to the first part of your message, that to do the 1031 (as you are sitting currently) then you would need to use the S-corp.

As to the second part, that is where the problem lies in using S-corps to hold real estate. If you were to transfer out of the S into a new LLC, you would owe the tax at that time (this is an S-corp rule). However, there is some structuring that can be done now, to divide up the interests without triggering taxes. I am more than happy to review them with you offline, as it would be hard to go over via the board.