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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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Is the owner of a Sub S Corp (S) a Real Estate Dealer?

Customer Question

Is the owner of a Sub S Corp (S) a Real Estate Dealer?
1. S incorporated in 1980 with a variety of assets (real estate, securities, royalties)
2. In 1990 S develops one parcel into 3 home lots, sells one lot and builds and sells 2 homes
3. Subsequent to #2 S buys and builds 5 homes (approx years 1995-2000)
4. S also invests in 9 apartment buildings during the 1995-2000 time
5. 2000-2013 - S has no real estate activity other than collecting rents
6. In 2013 S acquires real estate for development and transfers property into an LLC with a third party
7. 2016 (est) the LLC completes development of 6 unit condominium and sell 6 each unit
8. As a limited partner S will report its share of profits as ordinary income
Question - at any time during this period, could S have been considered a real estate dealer or will it be considered a dealer even though the condo sales are in a LLC?
Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Is "S" the owner of the S-Corp or is "S" the S-Corp itself?

What role does the owner of the S-Corp play in the S-Corp? In other words is he active in the S-Corp.

All the construction activity is definitely an operating business resulting in ordinary income; if the S-Corp is doing more than simply holding title to the land it's developing, putting in roads or utilities, etc. and whatever is done is done by the S-Corp I would say the S-Corp is definitely a Real Estate Development Company and it's activities are "ordinary" in nature. Rents are ordinary income, but if & when the apartment buildings are sold, it's possible that some of the income would be treated as ordinary income due to the depreciation recapture rules; the rest of any gain would be a capital gain; the sale reported on Form 4797.

So, I guess I don't understand what the nature of your question is? If "S" is the S-Corp all of it's income appears to be ordinary at this point, the only exception being the future sale of the apartment buildings where no development has taken place and there was no other development activity from 2000-2013, where is there a possibility of treating any income as capital in nature?