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Is this a multiple owner S-corp? Or simpley a husband-wife s-corp?
What is the S-corp business?
I am the only owner of the S-corp. My wife is not a shareholder. Well, her name is XXXXX XXXXX the S-corp.
The S-corp is a consultant business. I do software programming.
Based on the information given, I do not recommend it.
Here are the reasons:
1. No one would get to take advantage of the capital gains exclusion. When you sell the house, you get to take capital gains exclusion of up to 500,000 if you file a married return. If the S-corp owns it, you do not get the exclusion. so you pay capital gains tax.
2. If you live in the home until death, then you have no home to will to decedents, and those who inherit the home may not get the stepped up basis which provided generous tax relief when they sell it.
3. You have to sell it to the business. If you quick claim it, then you are legally liable for the note and the S-corp is on title. You have to sell it to the S-corp.,
4. If the corp owns it, you would have to pay FMV rents else you are receiving a benefit, one of you would have to pay taxes on the FMV rent. (whether rent is paid or not) That is if you receive living there rent free, then that is income to you; and if you pay rent, the S-corp has to report the income and you pay taxes on it.
5. You risk loosing the house if the business fails. It is an asset to the S-corp for which creditors can come after.
Can you explain more about #3? what do you mean "you have to sell it to the business"?
When you transfer the deed to the home to the business you haver the option of a quick deed.
A quick deed transferring the home to the S-corp, means that the property becomes the property of the business. It is not your property any longer. As such, if there were a mortgage (you state that your mortgage is paid off), you would remain liable for the mortgage, but the S-corp becomes liable for the property taxes. Your equity in the property is gone, but you have equity then in the business. BUT this is a wash because you are the only share holder. So value of the business increases, with no expense of acquisition.
When you dispose of the business later there is capital gains tax on the business, and you have capital gains on the home if you have an asset sale. either way it results in a capital gains later on.
If you sale the property to the business, then if there were a mortgage, then he mortgage is paid off at sale and the business becomes 100% liable for all the loan if any and the taxes.
When you gift it, by quick deed, then the property has a cost basis equal to your cost basis, which leaves the business with a large capital gain at sale.
If the business buys it from you, there is an acquisition cost, and a new cost basis, which, even though the home is subject to capital gains at sale is less than if you gifted it.
when you sell it to the business, you will haver a capital gain, but if you have lived in it for two of the past 5 years, you can take a capital gain exclusion. AS long as the IRS does not consider you an alter ego corporation, you will still be able to take the capital gain exclusion when you sell it to the S-corp.
When you keep living in this property if you live rent free, then this is a benefit on which you have to pay taxes, and the property is depreciable, not held for investment. (for use of the shareholders or employees where you as single shareholder are considered an employee corporate officer).
If you rent from the corporation it is depreciable property.
IN addition to capital gains tax, the corporation is subject to paying capital gains and recapture tax on accumulated deprecation when and if the property is sold.
In most instances, it never pays to move private property that is a principle residence to corporate ownership.