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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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Involving the question about transferring property from a corporation

Resolved Question:

Involving the question about transferring property from a corporation to an LLC. I have 2 business owners who own property in a C Corp. For liability purposes they want to transfer the property to an LLC and obviously do not want to pay any tax now. The land has a basis of $400,000 and is appraised at $4,000,000. Is it true that if the C Corp they currently own then owns the LLC they set up you can transfer the property tax free by doing a capital contribution. Also, if the C Corp is sued above and beyond their insurance coverage can the LLC owned by the C Corp be liable for the property transferred? Thank you very much in advance.
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

R. Klein, EA :

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

R. Klein, EA :

The main question is "how is the LLC taxed?"

R. Klein, EA :

LLCs are not recognized for federal tax purpose. An LLC can choose it's tax form, depending on the number of members

R. Klein, EA :

There is no need to keep entering and exiting the chat,

R. Klein, EA :

Also, are there owners of the LLC besides the C-corp?

Customer:

I understand how an LLC is taxed. The C Corp would be 100% owner.

R. Klein, EA :

If the C-Corp is the sole owner of the LLC, then the LLC is tax as a pass-through entity and no gain or loss is realized on the transfer of assets to the LLC.

R. Klein, EA :

All income is passed back to the C-Corp

R. Klein, EA :

In general, holding property in a C-Corp is not a great idea due to the tax on capital gains because there is no preferential treatment for tax purposes. The corporation pays its regular tax rate on the gain.

Customer:

Ok, I see. So at the time when the land was sold it would pass through as a capital gain on the C Corp? The land does have a cell tower that produces rental income. Would this effect the situation? Thanks so much for all your help.

R. Klein, EA :

It has no effect because all income to a c-corp is taxed at the same rate.

Customer:

And the capital gain would be at their current income tax rate and not at a short term or long term rate depending on the holding?

Customer:

Sorry. We were typing at the same time.

R. Klein, EA :

There is only one tax rate for c-corps. It starts at 15% and quickly goes to 35%

Customer:

Correct.

R. Klein, EA :

Only the first 50K of income is at 15%

R. Klein, EA :

The LLC simply provides another legal of LEGAL protection, but does nothing for taxes.

R. Klein, EA :

that's another LAYER of LEGAL protection

Customer:

So basically you would set up the LLC with the C Corp being the 100% owner then transfer the property to the LLC by a capital contribution. The C corp is a transportation company so if they are sued and the land is in the LLC it can not be touched? Correct?

R. Klein, EA :

I will leave the legal protection question to the lawyers. That's outside the scope of a tax question.

R. Klein, EA :

THe important thing is no gain or loss is recognized on such a transfer.

Customer:

So if the owners of the C Corp are the members of the LLC. Is the tax paid at the C Corp level for the capital gain or is it passed along to the shareholders and they pay at their capital gain rates?

Customer:

The C Corp owning 0% in this situation.

R. Klein, EA :

If the owners of the C Corp are members of the LLC then the C Corp does NOT own the LLC and gain or loss IS recognzed because the asset leaves the C Corp

R. Klein, EA :

In this scenario, the C Corp recognizes gain and it is taxed at the C corp rate! 25%

R. Klein, EA :

35% rather

R. Klein, EA :

I apologize, I have a client waiting. I will return in about 20 minutes if you need further help on this topic.....please excuse me.

Customer:

Ok. Any other way to get the land out of the C Corp without it being a taxable event?

R. Klein, EA :

I un-apologize! The client has been taken care of!

R. Klein, EA :

There is no way to get the asset out of the C-Corp without there being a taxable event.

Customer:

Haha. Thanks so much for all your help so far.

R. Klein, EA :

You can exchange the property for something else, but you would still end up with real property in the corp

Customer:

I heard of section 355 applying to this but it doesn't make sense to me? Any thoughts?

Customer:

Like kind exchange I'm assuming?

R. Klein, EA :

A 355 is effectively a tax-free spin-off. You would have to create a separate entity first.

R. Klein, EA :

Section 355 allows a corporation with one or more businesses that have been actively conducted for five years or more to make a tax-free distribution of the stock of a controlled subsidiary provided that the transaction is being carried out for a legitimate business purpose and is not being used principally as a device to bail out earnings and profits

R. Klein, EA :

Any like kind exchange would require you to replace the building with some other $4MM income-earning asset. It does not solve the problem

Customer:

Ok. Thank you so much for your help. Is there any way to request your services for my questions in the future or do I just happen to get whomever is available?

R. Klein, EA :

You may put my name first = Randall K

R. Klein, EA :

If I am online, I will have 15 mins to respond then the question goes to the first available agent

Customer:

Ok. Thanks again for all your help.

R. Klein, EA :

Thanks for using JustAnswer today. Please take a moment to provide a positive rating! If you need further follow-up just ask!

Customer:

Ok. How do I follow up? Just come back to JustAnswer and ask the question again? Sorry for all the questions, this is my first time.

R. Klein, EA :

Even after you have made a rating, you can come back to ask a follow up as long as it is on topic. New topics require a new question.

R. Klein, EA :

Just bookmark this page if needed for referecne

Customer:

Perfect. Thanks and hope you have a great weekend.

R. Klein, EA :

You too!

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2927
Experience: Over 20 Years experience
R. Klein, EA and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Mr. Klein,

Thank you very much for all your help and I look forward to keeping in contact in the future. Just a little background on myself. I have been in public accounting for 15 years and have started my own firm. I am a sole proprietor so I'm missing that additional team member or staff to bounce ideas off of day to day. Hopefully we can keep in touch. Your information 2 weeks ago was very helpful. Below is my contact information if you would like to reach me personally at anytime.

Thanks again and I hope you have a great day.

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R. Klein, EA
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