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Tax Law (Questions About Taxes)/Distribution of retained eanrings......


QUESTION: Thank you for taking the time to read my question.

I purchased a 4 unit property 5 years ago through my S-corps (no mortgage)

I want to get it out of the S-corps and was thinking a good way would be to transfer it in payment of retained earnings in S-corps. I am the sole share holder.

ANSWER: Your suggestion to get properties out of an S-Corp by distributing R/E in kind does not make accounting sense.

If you transfer the assets out of the corporation, you effectively have sold them.

If you bought say a building for $100K cash (0 for land), the building's basis is now somewhere around $82,500 after depreciation adjustment. Your retained earnings is probably not that high anyway unless you have a gigantic profit margin and you have taken zero distributions. So, transferring the building out of the corporation would cause you to have a realized gain or loss on the building, and probably have instant capital gains because the building's value is higher than the R/E account.

I don't think this makes much sense.

---------- FOLLOW-UP ----------

QUESTION: My retained earnings are much more then the full FMV of property.

Thank you for your help.

If you take the building out of the corporation, you will have an effective sale of the asset. You must realize gain or loss on the transaction.

You can sell it to yourself at FMV, but be careful since this is not an arm's length transaction. Once you personally own the building, what will you do with it outside of the corporation?

If you don't mind doing that, then go ahead.

Might I ask how you ended up with giant retained earnings and no cash and the R/E is bigger than the value of the building?  If you are making so much profit, but no cash and the building was paid for in cash, this is a perplexing situation.

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Randall Klein, MBA, EA


I am an expert in personal and small business taxation, including Forms 1040, 1120, 1120S, 1065. I can answer any type of tax question except those that are requesting help in illegal tax evasion. Tax avoidance is legal, however. I do not do offshore trusts, or opt-out of the tax system type of queries.


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