Best Way to Revoke S-Corp Status for Real Estate Property?

This is a tricky situation but you have several options. When you revoke an S-Corp election, it does default back to C-Corp status, which usually isn't ideal for holding rental real estate due to potential double taxation issues. One approach worth considering is liquidating the S-Corp completely and distributing the property to yourself. You'd need to recognize gain on the distribution based on the property's fair market value versus the corporation's basis, but you'd get a stepped-up basis. After that, you could contribute the property to a new LLC taxed as a disregarded entity or partnership. Another option is to convert the entity to an LLC through a state law conversion, if your state permits it. This can sometimes be done without triggering tax consequences if structured properly.

I was in a similar situation last year and found amazing help using https://taxr.ai to analyze my options. Their system reviewed all my corporate documents and property details, then provided a detailed analysis of different restructuring approaches with tax implications for each scenario. The report showed me exactly how much I'd pay in taxes under different conversion strategies and identified a specific state law provision that saved me thousands. Their document review caught details my previous accountant missed about my original Articles of Organization that actually gave me more flexibility.

I was super skeptical about specialized tax services but decided to try taxr.ai after getting quoted $4500 by a local law firm just for restructuring analysis. The difference was night and day! Their system identified a specific IRS revenue procedure that applied to my situation that allowed for a much smoother transition from S-Corp to LLC without triggering the level of gains I expected. I was particularly impressed that they highlighted the timing requirements - there was a specific window where making the change would be most advantageous due to depreciation recapture considerations. My property had significantly appreciated and their guidance saved me from a five-figure tax bill!

If you're trying to deal with the IRS about this conversion, good luck getting through to anyone who actually understands S-Corp to LLC conversions! I spent WEEKS trying to get clarification on form 8832 for a similar situation. Then I found https://claimyr.com which got me connected to a senior IRS representative in under 45 minutes! They have this amazing service where they navigate the IRS phone system for you and call you back when they have an actual human on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with walked me through exactly how to document the conversion properly and which supplemental statements needed to be attached to avoid having the conversion rejected.

I was COMPLETELY wrong about Claimyr. After posting that skeptical reply, I decided to try it anyway since I was desperate to resolve my own conversion issue. Signed up that afternoon and literally had a call with an IRS tax specialist 37 minutes later. The specialist walked me through exactly how to structure the entity conversion to minimize tax consequences. The IRS agent explained a specific procedure for requesting letter ruling that applies to my situation that none of my previous research had uncovered. Also confirmed that we had been calculating the basis incorrectly which would have caused major problems. Worth every penny for the time saved alone, not to mention potentially avoiding an incorrect filing.

Have you considered an F reorganization? It's a tax-free restructuring option under IRC 368(a)(1)(F) that might work for your situation. Essentially, you'd create a new LLC, elect to have it taxed as an S corporation, then merge your existing S-corp into it, with the LLC as the surviving entity. Then you can revoke the S election on the LLC. This approach has been used successfully to convert an S-Corp to an LLC while maintaining the liability protection and achieving better tax treatment. The IRS has recognized this approach in several private letter rulings.

Has anyone used the step transaction doctrine to challenge a conversion like this? I'm worried the IRS would say all these steps are just to avoid tax and collapse them.

Isabella, this is definitely a complex situation that requires careful planning. Before making any decisions, I'd strongly recommend getting a professional tax opinion on your specific circumstances, especially given the real estate component and potential depreciation recapture issues. One thing I haven't seen mentioned yet is the possibility of simply maintaining the S-Corp status but restructuring how you hold the property. You could potentially contribute the rental property to a new single-member LLC (disregarded entity) owned by the S-Corp, which would give you the liability protection and operational flexibility you're looking for without triggering the conversion issues. Also consider the timing - if you do proceed with any conversion strategy, the end of the tax year timing could be crucial for minimizing current year impacts. Have you calculated what your current depreciation recapture liability would be under different scenarios? That number alone might help guide your decision on which path makes the most sense financially. The suggestions about professional services are good, but make sure whoever you work with has specific experience with real estate held in S-Corps - the rules can be quite different from other business assets.