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When you own two rental properties in an S Corp and you sell

one does that release the...
When you own two rental properties in an S Corp and you sell one does that release the suspended passive activy losses for that property or do you have to sell both properties and terminate the S Corp to release the suspended passive activity losses.
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Answered in 11 minutes by:
10/29/2013
USTaxAdvising
Category: Tax
Satisfied Customers: 1,237
Experience: US Taxation specialist.
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USTaxAdvising :

Hello,

USTaxAdvising :

If you sold one property that had a suspended passive activity loss then that loss would get released.

USTaxAdvising :

You do not need to have both the properties sold.

USTaxAdvising :

Having said that though you would have needed to report both of the activities on the S corp return and not group them into one. Rarely I see anyone make the grouping election just for the exact reason. If you group you cannot realize losses from one sale until the entire grouped activity is disposed.

USTaxAdvising :

See Publication 925:





Grouping Your Activities






You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules.


Grouping is important for a number of reasons. If you group two activities into one larger activity, you need only show material participation in the activity as a whole. But if the two activities are separate, you must show material participation in each one. On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity.


Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity

Customer:

from prior research that i have done if the properties are owned in an s corp the s corp has to dissolve. a few lawyers that i have talked to have said that they create an s corp for each property for suspended loss reasons and for liability purposes. the properties are stated separetly on an 8825 schedule attached to the s corp. but the combination comes out on the k-1 as one activity. there is no way to keep track separetly. i would have to go back and restate the carryovers for each property

USTaxAdvising :

I see where you are going with this. You are not materially participating in the S-corp thus the S-corp itself is a passive activity to you.

USTaxAdvising :

Based on this then Yes I would agree with your comment above but the S-corp does realize the loss on the property it is just that you can't realize all the loss because the S-corp activity is passive to you.

Customer:

in my experience if multiple properties are held by an individual then when you sell one you are disposing of your entire interest. but in an s corp it seems that to dispose of your entire interest you must dissolve the company

USTaxAdvising :

in my experience if multiple properties are held by an individual then when you sell one you are disposing of your entire interest. - yes, correct

USTaxAdvising :

but in an s corp it seems that to dispose of your entire interest you must dissolve the company - you don't have to dissolve the company it's just that the losses are suspended until you have gains or dissolve.

USTaxAdvising :

Hang on while I check something.

Customer:

so is my opinion on the s corp suspended losses correct. that the whole corporation has to be dissolved and all properties sold to realize the suspended losses?

Customer:

ok

Customer:

how do i get a copy of the questions and answer?

USTaxAdvising :

you can keep the internet explorer link.

Customer:

how do i do that

USTaxAdvising :

Just copy the browswer link in your internet explorer bar. Alternatively you can bookmark this page.

USTaxAdvising :

YOu could also copy and paste the chat into word

Customer:

can you walk me through this

USTaxAdvising :

I am having a hard time accepting the point above from you lawyers comments. If you have an S-corp that has an activity that has a suspended passive loss and you dispose of that activity the loss is released to you the shareholder. It is not suspended in the S-corp until you dissolve the S-corp.

USTaxAdvising :

The biggest reason folks don't use S-corps for rental real estate is because they don't want to pay themselves wages and self employment taxes.

Customer:

it is not suspended in the scorp but suspened on the individuals return.

USTaxAdvising :

it is not suspended in the scorp but suspened on the individuals return. - No, the individual can claim the loss as well. The rental activity basically gets passed on to the shareholders. If it get's disposed then the losses are released to the shareholders and they can claim them since they are disposed.


USTaxAdvising :

You don't need to dispose of the S-corp to claim the loss.

Customer:

i agree not the ordinary rental losses but the suspended ones from my research on an scorp do not get released until the scorp is dissolved since the activity is the scorp ownership interest not the individual properties

USTaxAdvising :

I am having a hard time agreeing with that.

USTaxAdvising :

See Publication 925:


Partial dispositions. If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. However, you can do this only if you can show with reasonable certainty:



  • The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and




  • The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of.





 


USTaxAdvising :

Partial dispositions. If you dispose of substantially all of an activity during your tax year, you may be able to treat the part of the activity disposed of as a separate activity

USTaxAdvising :

I am quite confident you can deduct the loss, you don't have to wait till the S-corp dissolves.

Customer:

in this case the properties represent 50% each of the activities of the scorp. one does not constitute substantial activity

Customer:

i dont want to take up too much time but in your opinion i should divide out the suspended losses allocable to each property and take the ones against the sold property in total in the year of sale of the that property.

USTaxAdvising :

I think the instructions spell it out perfectly -


The passive activity limitations do not apply to the corporation. Instead, they apply to each shareholder's share of any income or loss and credit attributable to a passive activity. Because the treatment of each shareholder's share of corporate income or loss and credit depends on the nature of the activity that generated it, the corporation must report income or loss and credits separately for each activity. see page 6 of the 1120S instructions www.irs.gov/pub/irs-pdf/i1120s.pdf‎


USTaxAdvising :

You would report each activity seperately. If an activity was disposed then report it as disposed. The suspended loss, if any, would be deductible by the shareholder. The shareholder does not need to dissolve the S-corp to realize the loss.

Customer:

ok thank you

Customer:

how do i get a copy of this

USTaxAdvising :

You can this page to your favorites, or bookmark the page.


 


I will also convert the chat to Question and Answer and then you can copy and paste it into word.


 

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