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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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Hello I inherited shares of a corporation that contains a building

Customer Question

Hello I inherited shares of a corporation that contains a building and land. The building has
been used for rental purposes for the last 10 years. I have sold the property and found out today that the property was not in the business name but my parents name. I was in the process of doing a 1031 exchange to avoid built in gains tax on the property, but since finding out the property is not in the c corp, I need to know if inherit this property at todays
cost basis or will still have to pay built in gains tax since it was depreciated by the corporation.
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Randalltax :

If you inherited real property, there is a step-up in cost basis on the date of death of the prior owner.

Randalltax :

You must use your best reasonable effort to determine the property value as of that date. If you sold the property soon after the death of the prior owner, you probably have a case that you sold it at the same value as the date of death.

Randalltax :

If there is little or no capital gain after considering the costs of the sale (commission, etc), then there really is no reason to effect a 1031 exchange. You will be incurring unecessary costs of the exchange in order to save nothing on your tax bill.

Randalltax :

A 1031 is effective only when you are trying to avoid a large tax, or at least a tax greater than the 1031 exchange fees.

Randalltax :

If this answers your question, please provide a positive rating. If we have not finished answering, please allow me to answer all your concerns about this topic first before rating.

Customer :

We have had a appraisal done and we are selling the property below the appraised value that we inherited at. The property has been used in a C corporation for 40 years and the building was depreciated in the c corp but is still titled under my parents name. I guess my biggest question is I inherieted shares of a corporation and also this property, when I sell the property is there a business tax consequence? ie built in gains

Randalltax :

You may need to visit a CPA about his, particularly one that may have handled your parent's returns previously.

Randalltax :

THere is obviously a problem in that your parents AND the corporation cannot both own the same property at the same time.

Randalltax :

A corporation cannot depreciate an asset it does not have title to. If the property was owned by the corporation, you have a double-problem in that there is no step-up in basis on the property because it is within a corporation. A sale would result in 100% gain within the corporation and subject to corporate taxes.

Randalltax :

This is what is termed "a Mess".

Randalltax :

You have 40 years of a corporation getting income and taking deductions from an asset it did not own. If it did own it, yo have a huge corporate tax.

Randalltax :

One normally does not put a depreciating real estate asset in a corporation for these reasons!

Randalltax :

The step up in basis would have only applied to the STOCK of the corporation, and had you wold the STOCK of the corporation holidng the asset, you would have had a step up in basis on the stock. But you sold the asset inside, so the income stays inside the corporation.

Customer :

Thats why I was doing a 1031 until I found out today the property is not held by the c corp and is in my parents name

Customer :

I have not concluded the sale yet

Randalltax :

You have a 40-year problem that you will need to visit a CPA or tax attorney to unravel. This is not something that $50 worth of advice can fix.

Randalltax :

Unless you find a quit claim or other legal documentation showing that your parents transferred the property from their personal name into the corporation, you have a legal nightmare ahead.

Randalltax :

And worse, you may have a cloud on the title, but probably not.

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R. Klein, EA
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