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I am looking to see if there are tax consequences for

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I am looking to see if there are tax consequences for selling commercial property under fair market value

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

There is a piece of property owned by 3 entities. An S Corp a Partnership and a trust. We want the property under one entity. The trust wants to buy the property from the other two at below fair market value

Accountant's Assistant: Is there anything else the Accountant should be aware of?

These entitiys are owned by related parties

Submitted: 4 months ago.Category: Tax
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Answered in 7 minutes by:
12/5/2017
Tax Professional: Lev, Tax Advisor replied 4 months ago
Lev
Lev, Tax Advisor
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When the property is purchased by a related party - that will not be a true bona file purchase transaction...

So for instance if property rights are sold by S-corportaion for less than the FMV and purchased by the related trust - that transaction will be partially treated as distribution from S-corportaion to shareholders and contribution to the partnership.

That transaction itself will be taxable - regardless if the property is not yet sold to the third party.

It might be more simple to avoid the sale transaction and have ownership rights distributed to shareholders and partners and have then contributed to the trust as long as the trust allows such transactions.

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Customer reply replied 4 months ago
How do you distribute ownership rights to the shareholders ?
Tax Professional: Lev, Tax Advisor replied 4 months ago

For legal purposes - you may simply transfer the title to one entity - that is based on how that transfer is registered in your county - so you may verify with your county Clerk.

For S-corportaion - that distribution is reported as the sale at the FMV - and will be reflected on form 1120S and K1s reporting the gain realized by each shareholder.

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Tax Professional: Lev, Tax Advisor replied 4 months ago

The distribution will be considered at the FMV to each shareholder and generally will not be taxable - but will reduce the basis in S-corporation shares.
After the basis is reduced to zero - any additional distribution will be reported as capital gain.

For the partnership - there will be a similar treatment, but distributions to partners who originally contributed that property will be tax free.

Correspondingly the basis in hand of shareholders / partners will be the FMV if distribution is taxable transaction for the entity and the basis will be transferred when distribution is not a taxable transaction.

You will need to transfer the basis to the trust where contributions will be made.

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