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Old 07-08-2017, 10:47 AM
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Question about Income Tax on the Sale of a Rental Property Owned Jointly by a Natural Person and a Corporation

This question is about federal income tax on the sale of a rental property, in a situation when the property is owner jointly by a natural person and a corporation.

The situation in question involves two legal persons; let's call them Alice (natural person) and Corp Inc (Subchapter S corporation, a.k.a. "small corporation"). Alice files Form 1040. Corp Inc files a separate tax return (Form 1120S). Alice is the sole owner of Corp Inc, and she is also the president of Corp Inc, so Corp Inc reports the shareholder income to Alice on Schedule K-1.

Alice and Corp Inc jointly purchased a rental property for $100,000. Alice owned half of this property, and Corp Inc owned the other half. They held (and rented out) this property for five years. Every year, they were deducting the straight-line depreciation, which was $3,637 per year, and thus they deducted $18,185 total over five years. The entire depreciation was deducted from the taxes of Corp Inc (on Form 1120S), and no depreciation was deducted from the taxes of Alice. (The fact that the entire depreciation was deducted from the taxes of Corp Inc, rather than being split between Corp Inc and Alice, may be a mistake, but those tax returns have already been submitted).

After five years, they sold the property for $140,000 (before the commissions), and paid $10,000 sales commissions. According to Forms 1099-S generated during the sale, Corp Inc received $70,000 of the sales proceeds (before the commissions), and Alice also received $70,000.

How should they pay taxes on the profit from the sale? What income from the sale should be reported by Alice (on Form 1040), and what income should be reported by Corp Inc (on Form 1120S)?

Please help. Thank you.



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Old 07-09-2017, 03:06 AM
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The situation in question involves two legal persons; let's call them Alice (natural person) and Corp Inc (Subchapter S corporation, a.k.a. "small corporation"). Alice files Form 1040. Corp Inc files a separate tax return (Form 1120S). Alice is the sole owner of Corp Inc, and she is also the president of Corp Inc, so Corp Inc reports the shareholder income to Alice on Schedule K-1.===>Correct

Alice and Corp Inc jointly purchased a rental property for $100,000. Alice owned half of this property, and Corp Inc owned the other half. They held (and rented out) this property for five years. Every year, they were deducting the straight-line depreciation, which was $3,637 per year, and thus they deducted $18,185 total over five years. The entire depreciation was deducted from the taxes of Corp Inc (on Form 1120S), and no depreciation was deducted from the taxes of Alice. (The fact that the entire depreciation was deducted from the taxes of Corp Inc, rather than being split between Corp Inc and Alice, may be a mistake, but those tax returns have already been submitted).

After five years, they sold the property for $140,000 (before the commissions), and paid $10,000 sales commissions. According to Forms 1099-S generated during the sale, Corp Inc received $70,000 of the sales proceeds (before the commissions), and Alice also received $70,000.

How should they pay taxes on the profit from the sale? =======>When you sell THE rental property, your profits are subject to capital gains tax since you don't get the same exclusions that you do on your personal residence.Most of the time, an S corp does not pay federal income taxes. The essential feature of an S corp is that shareholders pay the taxes on income, not the corp.however, when the S corp was previously operated as a C corp and aslongas the two requirements are met: One, that the S corp has net passive income (dividends, interest, capital gains, rental income, and so on), and two, that the corporation has retained some of the profits from its old "C corp years".In the situation, if the S corp's net passive income exceeds 25% of its gross receipts for the year, then the S corp pays the highest corporate income tax rate on the net passive income. Which is a bummer.And, unfortunately, the excessive passive income penalty gets even worse. If an S corp suffers from the excessive passive income tax three years in a row, the S corp's "S corp status" automatically terminates.

The depreciation you have claimed over the past five years is subject to "recapture rules," which means you need to report some of the gain when you sell the property at ordinary income tax rates and some of the gain at capital gain tax rates. S corp




Note;Rental property is owned by an individual when the owner takes title in his own name, not in the name of a business entity such as an S corp. Individual needs to file IRS Sch E so,THE S CORP OWNER?S rental property should be reported on his Sch E Also Landlord who owns his pty through business entity doesn?t use ?individual Sch Es to report his rental income or losses. Instead, S corp files IRS Form 8825to report the income and deductions from the property owned by the entity. This form is very similar to Sch E and the owner finally needs to report his rental income on his, Sch k1, 1040. You Can Use an S Corp For Real Estate Investing. But most of the time, real estate investors shouldn't use an S corp. The "no self-employment tax" angle is important. Because real estate investors typically would not pay any self-employment tax anyway, real estate investors who use an S corp don't get any extra self-employment tax savings from an S corporation. The only thing the real estate investor does by using an S corp is complicate his or her tax accounting.Also, perhaps after decades of successful real estate investing, you may decide that you want to begin to gift property or percentage interests in your property to your children or grandchildren.
Unfortunately, you will not be able to gift real estate from the S corp to a child or grandchild without paying tax at the time of the asset is removed from the S corp.


What income from the sale should be reported by Alice (on Form 1040), and what income should be reported by Corp Inc (on Form 1120S)?======>as mentioned above; S-corps are pass-through entities. That is, there is no federal income tax levied at the corporate level. Instead, an S-corp?s profit is allocated to its shareholder(s) and taxed at the shareholder level. Of course, each state has its own rules regarding S-corp taxation. Some work like the federal income tax in which shareholders pay taxes on their share of the income. Other states tax the S-corp directly. For instance, in Illinois, S-corps pay a 1.5% tax on the S-corp?s Illinois income. This tax is in addition to the income tax that shareholders pay on their share of the S-corp?s income.



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