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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4011
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Is there any way a S corporation can do a 355 D split off of

Resolved Question:

Is there any way a S corporation can do a 355 D split off of real estate assets and then have the individual Sub S Corps sell the property without tax consequences?
Submitted: 8 months ago.
Category: Tax
Expert:  Stephen G. replied 8 months ago.

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

I may not be following what you are suggesting, but how would that eliminate the "tax consequences" of selling the real estate?

Customer:

A family owned corporation owned a large piece of real estate that has recently been sold. The proposal is to do a 1031 exchange for 6 new properties and then split the corporation into 6 sub-s corps. If that all takes place, tax deferred, Is there any way the sub-s corps can sell the property without a tax consequence?

Customer:

The current tax basis is zero

Stephen G. :

If that strategy is implemented it is simply designed to defer the tax on the first sale using the 1031 rules. There's no way for the new Sub-S corps to sell the property with no tax consequences any more than there was for the original family owned corporation.

Stephen G. :

They could of course do a 1031 exchange, but that doesn't help if the objective is to cash out.

Customer:

The principles involved are old. Would the tax basis in the sub-s corp be stepped up to market value upon the death of the principle? In which case it could then be sold without capital gains?

Stephen G. :

The value of the S-Corp stock would be stepped-up depending upon the size of the estate and which assets the executor chooses in some cases.

Stephen G. :

The property itself wouldn't be "stepped-up" in any case.

Customer:

So upon death the only asset in the sub S, the property, could not then be distributed to the spouse tax free in exchange for her shares?

Stephen G. :

Sure, there are stock redemptions that would do just that; the point being that the S-Corp is not usually used as an estate planning strategy.

Customer:

I understand but now that the assets are stuck in the corporation, we are just exploring options to receive the assets without paying a lot of taxes.

Stephen G. :

Receive the assets to dispose of them?

Customer:

To potentially transfer the property to an LLC or sell it at some point.

Stephen G. :

You mean after the death of the principal who still owns the S-Corp stock?

Stephen G. :

There would be nothing gained by transferring the property to an LLC.

Customer:

Looking at either then or now. Trying to separate from the current corporation without capital gains.

Stephen G. :

Well, you can't do it now without tax consequences; if that were possible you wouldn't need 1031 in the first place.

Customer:

In conclusion, is it correct that upon a principals death there could be a tax free distribution of the property?

Stephen G. :

Yes, with the caveats I mentioned above.

Customer:

Thank you for your assistance

Stephen G. :

You're welcome. Thanks for using JustAnswer.com.

Stephen G. :

Please remember to rate my response; it is the only way we get credit for our work.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4011
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 3 other Tax Specialists are ready to help you

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