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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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