Have Tax Questions? Ask a Tax Expert for Answers ASAP
Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.
I may not be following what you are suggesting, but how would that eliminate the "tax consequences" of selling the real estate?
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?
The current tax basis is zero
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.
They could of course do a 1031 exchange, but that doesn't help if the objective is to cash out.
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?
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.
The property itself wouldn't be "stepped-up" in any case.
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?
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.
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.
Receive the assets to dispose of them?
To potentially transfer the property to an LLC or sell it at some point.
You mean after the death of the principal who still owns the S-Corp stock?
There would be nothing gained by transferring the property to an LLC.
Looking at either then or now. Trying to separate from the current corporation without capital gains.
Well, you can't do it now without tax consequences; if that were possible you wouldn't need 1031 in the first place.
In conclusion, is it correct that upon a principals death there could be a tax free distribution of the property?
Yes, with the caveats I mentioned above.
Thank you for your assistance
You're welcome. Thanks for using JustAnswer.com.
Please remember to rate my response; it is the only way we get credit for our work.