How to Revoke S-Corp Status for Real Estate Holding Entity?

Thanks for confirming my suspicions about the S-Corp structure for real estate. The 1031 exchange limitation is a huge drawback I hadn't fully considered, and my client might want that option in the future. Quick follow-up: If we file Form 8832 to revoke the S election, are there any potential tax consequences we need to prepare for during this transition? The S-Corp was formed about 8 months ago and hasn't conducted much business yet.

Since the entity is relatively new with minimal activity, the tax consequences should be manageable, but there are still some potential issues to consider. When revoking an S election, you technically cause a deemed liquidation which could trigger recognition of built-in gains. However, if there's been little change in property value since formation, this might be negligible. You'll need to file a short-period final S-Corporation return up to the date of revocation. Then, moving forward, the taxes will flow through on Schedule C or Schedule E of your client's personal return, assuming you're going with the single-member LLC treatment. If there are any accumulated earnings or loan accounts within the S-Corp, those will need special attention during the transition.

How long did the whole conversion process take for you? I'm considering doing something similar with my vacation rental property that I stupidly put into an S-Corp structure two years ago.

I'm a bit skeptical about these online services. Did they actually help with filing the paperwork or just give you a report that you had to implement yourself? And how did they handle the "deemed liquidation" that supposedly happens when you revoke S status?

The entire conversion process took about 6-8 weeks from the time I decided to move forward. Most of that time was waiting for IRS confirmation, but the actual preparation of documents was pretty quick once I had the right guidance. What I appreciated about taxr.ai was that they didn't just provide a generic report. They analyzed my specific operating agreement and financial situation, then created customized documentation. They didn't file the paperwork for me - I still needed to submit everything myself - but they prepared all the necessary forms with the correct information filled in, and they provided detailed instructions for filing everything with both the IRS and state authorities.

Can you actually request to revoke S status outside the normal timeframe? I thought you were locked in for 5 years after electing S-Corp status.

This seems too good to be true. The IRS phone lines are notoriously impossible to get through. How exactly does this service work? Do they just spam call the IRS until they get through or something?

You can request to revoke outside the timeframe with a reasonable cause, especially if you can demonstrate that the S election was made without understanding the tax consequences. It's discretionary, but the IRS is often reasonable if you have a legitimate business purpose for the change. Regarding how Claimyr works - it's not spam calling. From what I understand, they use a system that monitors IRS phone lines and automatically connects you when an agent becomes available. They basically handle the waiting for you, so instead of hanging on the line for hours, you get a callback when they've reached a human. It's completely legitimate and simply automates the painful waiting process.

This is really helpful - I think I was confused about the process. So we can't directly go from S-Corp to LLC treatment in one step? Do you know if there's a waiting period required between these two steps, or can they be done simultaneously?

You're right that they're technically two separate steps, but fortunately they can be handled essentially simultaneously from a practical standpoint. When you file the paperwork, you would include a statement revoking the S election along with the Form 8832 requesting disregarded entity treatment effective the following day. For example, you might revoke S status effective December 31, 2025, and request LLC/disregarded entity treatment effective January 1, 2026. This minimizes the time spent as a C-Corp and generally streamlines the process. Just make sure all your documentation clearly specifies these consecutive dates to avoid any confusion with the IRS.

That F reorganization approach sounds interesting but complicated. Do you know if common tax software like TurboTax or TaxAct can handle reporting this kind of transaction correctly? I'm trying to avoid hiring a specialized accountant if possible.

I'd strongly advise against trying to handle an F reorganization with standard tax software like TurboTax. This is a complex transaction that requires specific forms (like Form 8832, potentially Form 368, and detailed statements) that consumer software typically doesn't handle well. More importantly, the F reorganization needs to meet very specific IRS requirements to maintain its tax-free status. If you mess up the documentation or timing, you could end up with the same deemed liquidation tax consequences you're trying to avoid, plus potential penalties. Given that your client's S-Corp is relatively new (8 months) with minimal activity, the simpler Form 8832 revocation approach that others mentioned might actually be less risky and more cost-effective than trying to execute a perfect F reorganization.

Great questions, Lucas! For your family member's situation with one rental property and 6 months of rent collection, that would typically be considered "minimal activity" if the property value hasn't changed much. The main concern with deemed liquidation is built-in gains on appreciated assets, so if the property is worth roughly the same as when purchased, you're likely looking at minimal tax consequences. However, you'll want to be careful about any depreciation that's been claimed on the rental property. Even if the market value hasn't changed, the S-Corp may have taken depreciation deductions that could create some recapture issues during conversion. Regarding California - yes, there are definitely additional state-level considerations! California doesn't automatically follow federal entity classification elections, so you'll likely need to file separate paperwork with the California Secretary of State and possibly the Franchise Tax Board. California also has its own S-Corp election rules that don't always align with federal timing. I'd strongly recommend consulting with a California tax professional who can navigate both the federal conversion and the state-specific requirements, as missing a California filing could create ongoing compliance issues.

You raise an excellent point about lender issues that often gets overlooked! I dealt with this exact situation about two years ago with a client who had a commercial property loan. The key is to be proactive with the lender communication. What worked for us was contacting the lender before starting the conversion process and explaining that this was purely a tax election change with no change in beneficial ownership. We provided documentation showing the same individual owned 100% before and after the conversion. Most commercial lenders understand these entity conversions happen for legitimate tax reasons, but they want to be informed rather than surprised. We also structured it as a simple revocation of S-Corp status rather than any kind of merger or reorganization, which helped frame it as a tax classification change rather than a transfer of ownership. The bank ultimately provided a written confirmation that they wouldn't invoke the due-on-sale clause as long as the beneficial ownership remained unchanged. Regarding the legal opinion letter - I haven't found it necessary for straightforward conversions where you're just revoking S status and electing LLC treatment. However, if you're doing anything more complex like an F reorganization, having that documentation could definitely be worthwhile insurance. The cost is usually modest compared to the potential headaches if something goes wrong. @Ava Harris Have you already reached out to your client s'lenders, or are you still in the planning phase?