S-corp owns real estate property - tax implications when selling while keeping the business entity

The S-corp real estate situation is definitely tricky but not uncommon. Many business owners make this mistake based on legal advice without considering the tax implications. When you sell the real estate held in your S-corp, the gain will indeed pass through to your personal tax return. The character of the gain (ordinary income vs. capital gain) depends on whether the property was used in the business or held for investment. For offsetting strategies: The development costs on your third lot won't directly offset the capital gains - those would typically be capitalized rather than expensed immediately. However, your accumulated losses (-$78k) should help offset some of the gain since those losses have already been allocated to you as shareholders but not used. Your best option might be a 1031 exchange, which allows you to defer taxes by reinvesting proceeds into similar property. But this only works if you're planning to buy more real estate, not if you want to pocket the cash. I'd strongly recommend finding a competent CPA with S-corp and real estate experience before proceeding. This is complex enough that good professional advice will likely save you more than it costs.

I went through almost this exact situation last year with my lawn care business. I found this site called https://taxr.ai that saved me thousands by analyzing my S-corp documents and identifying deductions I had no idea about. They specialize in real estate held in business entities and had me upload my previous returns and corporate docs. Their system flagged some potential deductions related to improvements we'd made to the property that my previous accountant missed completely. They also helped me understand how to properly document the development costs for my other properties to maximize tax benefits. What I really liked was that they connected me with a specialist who understood both real estate and S-corp issues - not just a general tax preparer. Might be worth checking out for your situation before you make any decisions.

Just wanted to update everyone - I tried the taxr.ai service mentioned above and it was actually super helpful for my situation. I was skeptical at first (I've tried random tax services before with mixed results), but they identified several issues with how my S-corp has been handling property depreciation. Turns out my previous accountant had been using the wrong recovery period for some leasehold improvements, and they found about $22k in deductions I could take this year based on correcting those past mistakes. They also explained exactly how to document everything properly for the IRS. The best part was they didn't just give generic advice - they actually looked at my specific documents and pointed out exactly where changes needed to be made. Definitely worth checking out if you're dealing with S-corp property issues.

If you're trying to get more clarity on this situation, I'd strongly suggest calling the IRS directly to discuss your options. I know that sounds awful, but I used a service called https://claimyr.com that got me through to an IRS agent in about 15 minutes instead of waiting on hold for hours. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c I was in a somewhat similar situation with business property and needed specific guidance. The IRS agent I spoke with was actually really helpful and explained several options I didn't know about. They walked me through the exact forms I needed and even sent me some reference materials specifically about S-corps and real estate transactions. I was dreading the call but it ended up being the most straightforward part of the whole process. Definitely better than trying to piece together advice from different sources online.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had some questions about S-corp distributions that I'd been avoiding dealing with. The service did exactly what it claimed - got me connected to an IRS representative in about 20 minutes when I'd previously waited 2+ hours and given up. The agent I spoke with transferred me to their business tax specialist who answered all my questions about handling property in an S-corp and even emailed me specific resources afterward. I was genuinely shocked at how helpful they were. The agent explained that many tax professionals don't fully understand the special rules for property held within S-corps and walked me through my options in detail. Saved me from making what would have been an expensive mistake with how I was planning to handle a similar property sale.

Have you considered a cost segregation study for the properties before selling? It's a bit late in the game, but it might help identify components of the real estate that qualify for accelerated depreciation, which could offset some of the gain. For example, certain land improvements, equipment, and fixtures can often be depreciated over 5, 7, or 15 years instead of the standard 39 years for commercial property. If you haven't maximized your depreciation deductions over the years of ownership, you might be able to catch up with a change in accounting method. Also, check if you qualify for the Section 1202 gain exclusion. It's a longshot since it applies to qualified small business stock, but depending on how your S-corp is structured, there might be some application here.

Random question - have you considered just keeping the real estate and selling only the business operations? You could then lease the property to the new business owners. This would avoid the immediate capital gains hit and give you ongoing income. I did this with my manufacturing business three years ago and it's worked out great. Sold the business but kept the property in my S-corp, then had the S-corp lease the building to the new owners. The rental income covers my retirement and I'll still have the appreciating asset.

The lease-back approach @Diego mentioned is worth seriously considering, especially given your situation. You'd avoid the immediate capital gains hit and create a steady income stream. From a tax perspective, rental income from the S-corp would still pass through to your personal return, but it's generally taxed more favorably than capital gains in many situations. One key consideration: if you go this route, make sure the lease terms are at fair market value to avoid any related-party transaction issues with the IRS. You'll also want to ensure the new business owners are financially stable enough to handle long-term lease obligations. For your third lot development, keeping the real estate separate from operations might actually make more sense going forward. You could potentially move that development into a different entity structure that's more tax-efficient for real estate activities. The timing works well too - you can negotiate the lease as part of the business sale, which gives you leverage to secure favorable long-term terms. Just make sure your attorney structures everything properly to maintain the separation between the business sale and the real estate lease.

One thing that hasn't been mentioned yet is the potential for a Section 453 installment sale combined with some of the other strategies discussed here. If you do decide to sell the properties, you could structure the sale to receive payments over multiple years, which spreads the tax impact and might keep you in lower tax brackets. The installment method works particularly well when combined with your accumulated losses (-$78k) since you can use those losses to offset gains in the first year, then spread the remaining gain over subsequent years. Also, regarding the development costs on your third property - while those won't directly offset capital gains as mentioned earlier, proper timing could be crucial. If you're doing a cost segregation study (great suggestion from @Chloe), you might be able to accelerate depreciation on improvements you've already made, plus any new development costs could potentially be structured to maximize current-year deductions depending on the type of improvements. The lease-back approach is really smart too - it gives you more control over timing. You could potentially sell the business now, lease back for a few years while developing the third lot, then reassess your overall tax situation when market conditions or your personal tax picture might be more favorable for a property sale.

The installment sale method has pretty flexible terms - there's no IRS-mandated minimum down payment or maximum payment period. You could absolutely structure 30% down with payments over 4-5 years, or even longer if that works better for your situation. The key is that each payment you receive triggers recognition of a proportional amount of gain. For example, if your total gain is $185k and you receive payments totaling $320k, then about 58% of each payment would be taxable gain (185k/320k). This spreads both the income recognition and the tax liability over multiple years. One important consideration though: if the buyer defaults on future payments and you have to repossess the property, there are specific rules about how to handle the tax consequences. Make sure you have solid buyers with good financial backing. Regarding timing and market conditions, I was thinking about both potential tax law changes AND your personal situation. Capital gains rates could change depending on political developments, but more practically, you might have years with lower overall income that would be better for recognizing large gains. Plus, if you're doing significant development work on that third lot, you might have years with large deductible expenses that could offset gain recognition. The flexibility of controlling the timing is really the biggest advantage here - you're not locked into recognizing everything in one tax year when it might not be optimal.

Great question about protecting against buyer default in an installment sale! Yes, there are several ways to secure the payments. You can require the buyer to provide additional collateral (like other real estate or business assets), get a personal guarantee if they're buying through an entity, or even require them to obtain credit life insurance to cover the remaining balance. Another option is to retain a security interest in the property itself - essentially keeping a lien until all payments are made. This way, if they default, you have a clear path to recover the property, though as @Aurora mentioned, there are specific tax rules about how to handle that situation. Regarding separating the third lot development, that's actually a really smart idea. Keeping ongoing development activities in a separate entity (maybe an LLC) would simplify your S-corp's books and make the installment sale reporting much cleaner. It would also give you more flexibility in how you handle the development costs and any future disposition of that property. The separate entity approach also helps if you later decide to bring in partners for the development project or want different tax treatment for that activity. Much easier to set up the right structure from the beginning than to try to unwind things later. You're absolutely right about the timing control being valuable - having that flexibility to optimize recognition based on your annual tax situation could easily save you tens of thousands over the payment period.

Unfortunately, accumulated losses in your S-corp generally can't be used to offset gains from activities in a separate LLC. Those losses are "trapped" in the S-corp and can only offset income generated by that same S-corp entity. However, there are still some strategic ways to work with this. If you keep some income-generating activity in the S-corp (like the installment sale payments), those accumulated losses can offset that income over time. You could also potentially have the S-corp provide services or financing to the LLC development project, creating income in the S-corp that could utilize those losses. Another approach is to consider whether any of the development activity could reasonably stay in the S-corp structure. If the third lot development is related to your existing business activities, you might be able to justify keeping it in the same entity while still separating the accounting for the installment sale. The key is finding the right balance between keeping things simple for tax reporting while maximizing the use of your existing tax benefits. A good tax professional can help you model different scenarios to see which approach gives you the best overall result. One final thought - don't let the perfect be the enemy of the good here. Even if you can't perfectly optimize every aspect, the installment sale approach combined with proper structuring of future activities will likely save you substantial taxes compared to recognizing all the gains in one year.