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Tax Law (Questions About Taxes)/S Corp to LLC Conversion with Real Estate


I have a client with an S Corp owned 50/50 with another individual.  The S Corp owns real estate with a FMV less than there cost so in other words it is unappreciated property/built in loss.  If they convert the S Corp to an LLC and in essence liquidate and take the liquidating distribution of the real estate then technically it is a considered a deemed sale for a loss.  My question is this loss deductible to them or is it a related party loss and therefore non-deductible.  


It is a related party loss.

If they took the loss now and the property increased in value later, they'd have a gain to pay taxes on later.  It always seems that when we need to take losses we are in a low tax bracket but when we are forced to pay taxes on gains we are in a high tax bracket. This is counter productive.

Why go through all these hoops? Spend time money and effort moving from one pass-through entity type with questionable liability benefits to another pass through entity type with even less provable liability protections?

Neither entity structure provides a tax advantage. They are, anyway, pass-through.  They simply push all the income to the individual tax return and rate. That passing through may also push some potential deductions to where they are unusable.

No tax advantage, no liability advantage, I the goal is less paperwork then the plan is horrendously misguided. No credible source will claim the LLC has a lower standard for compliance than a real corporation, in fact, since little or no case history exists to set acceptable standards for LLCs. . . if the LLC was hoping for a protection equal to a corporation, not only would they have to comply with the Corporate Standard to make a claim for corporate level protections, they would also need to do enough more paperwork to make the claim for an exception to be considered a corporation.

Richard Fritzler
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Richard Fritzler


Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.


I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

National Small Business Owners Association.
Contributing author to "The Corporate Standard Newsletter".

Contributing author to "The Corporate Standard Newsletter".

I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

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