Act Now to Minimize the Corporate Gain on Real Estate

Since the advent of LLCs and S Corporations, tax consultants generally have advised clients to keep their real estate holdings outside of C Corporations because of the potentially devastating tax ramifications of a future sale. Unfortunately, for a variety of reasons, taxpayers find themselves in this position more often than you would think. The good news is the current economy provides a unique opportunity to minimize the tax impact of removing real estate from C Corporations.

C Corp Property

There are two primary ways to remove real estate from a C Corporation and maintain control of the property:

  1. Distribute the real estate as a dividend, or
  2. Sell the real estate to a related party

Distributing real estate as a dividend is rarely a viable method because the transaction doesn’t provide cash to the C Corporation to cover the tax generated by the distribution. One instance where this strategy can work is when the C Corporation has net operating losses or capital losses to offset the gain at the corporate level.

A better method is a sale of the real estate to a related party. Unlike a distribution, the corporation will receive cash which can be used to cover the tax generated by the sale. Furthermore, the shareholders are not subject to tax since there is no dividend distribution. In a down market, this option keeps the tax bill associated with the sale manageable, moves future appreciation of the property outside the corporation and maintains the taxpayer’s control of the property.

A third, less obvious, solution is for the corporation to make an election to be taxed as an S Corporation. This option removes a layer of tax from the ultimate sale of real estate, but only after the statutory built in gain holding period.

As is the case with any real estate transaction, there are a multitude of tax and legal ramifications to consider. Because every taxpayer’s situation is different, it is imperative that you review off of the options with your tax advisor before proceeding.