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Old 09-01-2011, 11:02 AM
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Renting personally owned property to business

I need advice from someone creative! My clients own 2 properties outright. These use these buildings in their business, but the buildings are titled to them personally. New clients for 2010 so rather late to change the books here. They paid themselves rent during the year from the C-Corp business, yet the buildings are on the Corporation's balance sheet and being depreciated. The rent expense is critical as a deduction for the corporation to minimize their taxes. If I remove the assets and do a Sch E on the clients' personal returns, there are no mortgage interest payments to offset the income and the property taxes were paid by the business. The only offset they would have is depreciation which is minimal, unless I don't have to take the 27 1/2 yr life??? Not to mention that the Corporation did not 1099 them for the rent. I tried doing an 1120-S instead of the 1120, hoping if I brought all income and expenses over to the 1040 it would help, but its actually worse. Now I'm looking at carryback financing....I'm not sure an installment purchase would work. And I think I've worked on this too long and thought about it too much, I can't come up with a scenario in which the company can deduct the "rent" paid as an expense (installment or carryback it would go to the asset purchase on bal sheet and not reduce income) and nothing to offset the (unreported) payment or rent on the owners' returns. Please help!


Last edited by hometaxprep : 09-01-2011 at 11:04 AM.


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Old 09-01-2011, 07:15 PM
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“They paid themselves rent during the year from the C-Corp business, yet the buildings are on the Corporation's balance sheet and being depreciated. The rent expense is critical as a deduction for the corporation to minimize their taxes. If I remove the assets and do a Sch E on the clients' personal returns, there are no mortgage interest payments to offset the income and the property taxes were paid by the business.”--->I guesss so; there are other factors that must be considered. Are they, the clients, related to the corporation? what were the arrangements of the lease/ rent? The fact that you remove the assets and do a Sch E on the clients' personal returns, I guess, means their corp( the clients themselves) is(are) paying rent in lieu of mortgage interest. I mean they are actually rent payments. Since they are actually related to the corp, for example, they are employees or officers of the C-corp, that makes me think that the rent payments are compensations for them. in that case, then C corp should issue them a 1099 to report their income, an dthey need to report them on Sch Es and 1040s.
“The only offset they would have is depreciation which is minimal, unless I don't have to take the 27 1/2 yr life???”---> Currently, the rules for Sec. 1250 property (generally, real estate) are that commercial realty is depreciated over 39 years and residential realty is depreciated over 27.5 years.
“Not to mention that the Corporation did not 1099 them for the rent.”--> It depends as said above.
“ I tried doing an 1120-S instead of the 1120, hoping if I brought all income and expenses over to the 1040 it would help, but its actually worse.”--->Not really; The terms "S Corp" and "C Corp" refer to tax structures set up in the IRS tax code.1120S for C corp?? S corp can rent the buildings from them; only the character of the income is at question ,i.e.,passive or not. I mean the passive activity rules for self rentals treat any loss as passive and any gain as not passive.Did your clients who are currently a C-Corp and want to convert to an S-Corp mainly to avoid double taxation? Then I guess they need to file the C Corporation (Form 1120) for the last time and file Form 1120S by the due date. The filing of the Form 1120S will finalize the change in your company's filing status as required by the IRS. Also as long as they have high pofits accumulated in the C corp, they are going to have built in gains taxes but also, all the undistributed profits will show up on their k-1(s) at the end of the year and would be highly taxed at that amount.
“ Now I'm looking at carryback financing....I'm not sure an installment purchase would work. And I think I've worked on this too long and thought about it too much, I can't come up with a scenario in which the company can deduct the "rent" paid as an expense (installment or carryback it would go to the asset purchase on bal sheet and not reduce income) and nothing to offset the (unreported) payment or rent on the owners' returns.”--->Agreed, but no rent expense. Not that I Know of.In general, when a seller carries financing,interest on those payments is deductible just as if you were making payments to a traditional lender. The main difference is that the seller may not provide monthly statements to you, and also may not provide you a 1099 after the end of the year to show you how much interest you've paid. Also, if it's an amortized loan, you're going to have to figure out how much of your payment has gone toward interest. However,so far as I know, about C corps and rentals is that a closely-held C corp with rental property is subject to passive activity rules. However, passive losses in closely-held C corporation can offset active income of the C corp (however, thisrule doesn't apply to PSC's) is profitable so tht it can generate sufficient active income.



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