S-Corporation now with only rent income

[JackieCPA]

I have a new S-Corporation client that owned a building that was a bar/restaurant. They have now sold the business portion (bar/restaurant) and currently still own the building and are renting it out to the new bar/restaurant owners. 

I am finding with IRS PLR 201229007 that rent income maybe not passive income depending on facts/circumstances. 

They pay the property taxes and some of the repairs on the building, but they pay no wages (to themselves or others) and sounds like they don't provide any substantive services on the property. Which makes me think that the rent is going to be considered passive, and they would need to revert back to a C-Corporation. 

My thoughts are they should probably dissolve the corporation and "sell" the property to a new LLC they created so they don't have the double taxation of the corporation. It also does look like they would have just enough basis for them to take a property distribution from the S-Corporation and then contribute the building to the new LLC. 

Any thoughts or am I thinking too much into this? 

[Lynn EA USTCP in Louisiana]

Look at an "F" reorganization from S Corp to LLC.  An attorney versed in these is a must.

 

[Lee B]

10 minutes ago, Lynn EA USTCP in Louisiana said:

Look at an "F" reorganization from S Corp to LLC.  An attorney versed in these is a must.

 

Wasn't aware you could do this 

Good discussion in The Tax Advisor:   https://www.thetaxadviser.com/issues/2020/sep/private-equity-f-reorganizations-s-corporations.html

[Abby Normal]

Dissolving any corporation with real estate in it is always a taxable event, which is why we always try to avoid putting the real estate into a corporation. Real estate should have been in a partnership/LLC from the beginning and the business should have paid rent to the partnership.

[JackieCPA]

31 minutes ago, Abby Normal said:

Dissolving any corporation with real estate in it is always a taxable event, which is why we always try to avoid putting the real estate into a corporation. Real estate should have been in a partnership/LLC from the beginning and the business should have paid rent to the partnership.

I'm in such a big agreement here with you. I wish whoever told them to do this at the beginning thought about the future more. 

[michaelmars]

Many of my clients have buildings in S corps because LLC's didn't exist in NY until around 1994.

[Abby Normal]

1 hour ago, michaelmars said:

Many of my clients have buildings in S corps because LLC's didn't exist in NY until around 1994.

We used to put them in partnerships back then. Never in corporations.

[michaelmars]

On 10/14/2024 at 1:46 PM, Abby Normal said:

We used to put them in partnerships back then. Never in corporations.

They got corporate protection and cheaper insurance in a corp.  Most of my clients own many properties and didn't want a law suit on one to put the whoel portfolio at risk.