The old advice for investing used to be to place property in an S-Corp or a C-Corp. However, if you want to take advantage of a 1031 exchange in your investing, that’s not the strategy you want to take. Join David Moore and Tina Colson as they discuss S-Corp and C-Corp exchange transactions.
What You Will Learn in This Video
- The problems with exchanging an S-Corp or C-Corp property
- What to do if your property is held in an S-Corp or C-Corp
- The alternatives to holding a property in an S-Corp or C-Corp
Watch the video or read the full transcript below to get the full details on what affects investment properties held in an S-Corp or C-Corp situation and what you can and should do as an investor.Read the Full Transcript
David Moore: Hi, David Moore, Equity Advantage, and I’ve got Tina Colson from our office here with me today. And Tina’s got some questions for me.
Tina Colson: I do. And so we are going to talk about the problem with properties in S-Corps and C-Corps today. So 20 years ago, investors were informed to place their properties in an S-Corp or a C-Corp. And we accommodate many types of 1031 exchanges. Generally, there are always ways to exchange properties with the partnerships. However, when we are talking about an S or a C-Corp, we always hit a major obstacle. Can you talk a little bit on that subject?
David Moore: Well, we always, once again, like to say, we’re the guys with the answers. Rarely is the question whether you can or can’t do something, it’s how you’re going to get it done. But this is one of those situations where I guess my primary statement is, do not hold your real estate in a corporation.
Tina Colson: Yes.
David Moore: So if you’ve got something in a corporation and it’s been done, it’s basically going to be there until it gets out, and there’s really no way to get it out without tax consequence. So your limited liability comes.
Fortunately, we don’t have to deal with this that much, but you’ve been with us a few months now, and we’ve already had this problem several times with different S’s and C’s, so it’s sort of funny things go in waves. But if you look at it, an exchange, anybody else that’s out there, biggest headache is always going to be time.
Tina Colson: Yeah.
David Moore: Second biggest is fasting and it changes state to state. It just changes, whether it’s community or non-community property estates. But the bottom line is if you’ve got property in a corporation and you have multiple shareholders and people want to go different directions, you’re stuck.
I mean, it’s really just not something that can be done because the distribution in and of itself is going to trigger the tax consequences. So there would be really no reason to do an exchange afterwards. So it’s not the fact that we could or could not do an exchange. It’s just doing an exchange after distribution just destroys any benefit that we’d be offering.
Tina Colson: Sure.
David Moore: So if you’re a single member corp or you’ve got other fellow shareholders in there, get them out, let them pay the tax, keep the corporation intact and you just roll forward with it, keeping it where it is. If they’re going to pay the tax anyway, then they shouldn’t object to it.
But if they don’t maybe… And this is crazy. I mean, once in a while, we have somebody come in and it’s been a great investment life, maybe 10 years together. And now at the end of the day, they’re all mad at each other. “And now Johnny wants to do an exchange and I’m not. I’m going to pay tax. And I don’t want Johnny to have the benefit.”
David Moore: So obviously we have to be adults here, but if you’re an adult, hopefully you can accommodate and get things, help people get where they want to go. But bottom line don’t hold your property in a corporation. If you want some form of partnership, use a limited liability company. They’re easy to create, easy to get rid of.
We still have issues. If it’s a multi-member entity and you want to, at the end of the day, do an exchange, go in different directions, it’s still going to require a drop and swap or swap and drop. So if you want to know more information about the partnerships stuff, you can take a look at any of our partnership videos. And we’ll talk about those processes.
Tina Colson: So let’s say that there are three or four partners and they’re in the S-Corp and three of them want out, one stays in, in that case, you can deed out your other three. As you’re saying, they pay the tax upfront. Now you’ve got one sole person holding the property. They’re stuck in that without any time that they want to sell it, they’re going to have that taxable gain. But what if they continue to retain, they do an exchange into a new property, they retain that property. And then is there a way to minimize the gain over time?
David Moore: Well, as an LLC, what you said will work. I mean, an LLC, we can do a drop and swap. So we’ll break the people out and then they each go different directions. And if they swap till they drop it all goes away, right? Or you swap until it makes tax sense or your passive investments, whatever you want to do. So with a limited liability company or a formal partnership, we can do that.
Tina Colson: Sure.
David Moore: The S’s and C’s, once again, I just want to stress out there, we can’t. I mean, we can do an exchange for somebody that takes a property out as distribution, but there’s no benefit to that exchange because the tax liability is incurred on that distribution. So that’s the whole thing.
Now I had literally two different calls this morning where people had inherited things over time and the one gal says, “Well, I was given this when my father died.” I said, “Well, we have to be careful because you’re either given the asset, which means that your basis is what theirs was, or you inherited it, which you got to step up.” So that’s a big, big difference. And that’s where…
David Moore: If people don’t have good, competent tax counsel, really, they’re doing themselves a disservice. I mean, they need to deal with good people that are going to give them good guidance and take advantage of that guidance. Not a tax return time. Please ask. Anytime you go to sell a property, talk to your tax people. Understand what your basis and gain is. Whether the exchange is the rational thing to do.
Tina Colson: Right.
David Moore: And we might be in a situation right now where people are looking at it, “Hey, we might buy 45 days to see if the exchange makes sense. But the further this thing goes, the harder it’s going to be. People might be wanting to pull some money out or all their money out. And that’s the situation.”
Make sure you understand, if you go into an exchange right now, you understand when you can get the money. And the bottom line is you can’t get the money out until you’re satisfied with what we call the 1031 G(6) rules, which mean that you can only get the money out after you’ve purchased everything you have the right to buy.
Tina Colson: Right.
David Moore: So that’s something that’s really important for people to understand right now.
Tina Colson: Yes. So the bottom line don’t go into an S-Corp or C-Corp property.
David Moore: Correct.
Tina Colson: It’s a bad idea.
David Moore: Don’t do it. Don’t do it.
Tina Colson: Yes. There’s no way out.
David Moore: Yeah. So, as I said at the beginning, no such thing as a dumb question. I thank you very much for joining us today. And Tina, you have anything you’d like to say?
Tina Colson: Again, thank you. And please feel free to call us, free consultations anytime. We love the discussions, we love the questions and anything that gets us thinking into a deeper track, it’s a good challenge. So we welcome that.
David Moore: Thank you. And look forward to speaking soon. Bye-bye.
Tina Colson: Bye.
1031 exchanges are complex. Using an exchange accommodator like Equity Advantage puts a professional in your corner who knows all the rules. It just takes a phone call to get started, 503-635-1031.