S-corporation owns real estate property - tax implications when selling while keeping the S-corp?

Your situation is actually pretty common - many business owners put real estate in their S-corps based on attorney advice without realizing the tax implications. For your capital gains situation, the S-corporation will recognize the gain on the sale of the real estate, and that gain will flow through to your personal tax returns based on your ownership percentages. It's considered ordinary income rather than capital gains when it flows through an S-corp. Regarding offsetting the gain - the development costs for your third property won't directly offset the gains from selling the other properties. Those development costs will generally be capitalized (added to the basis of the new property) rather than expensed immediately. Some portions might be deductible, but most will be depreciated over time. The negative accumulated adjustments account (AAA) of $80K represents previous losses that flowed through to shareholders. This doesn't directly offset new gains, but it affects your stock basis, which is important for determining taxable income on distributions. My suggestion would be to explore a 1031 exchange if you haven't closed the sale yet. This would allow you to defer the gain if you purchase similar replacement property. There are strict timelines and rules, so you'd need to act quickly. Another option might be an installment sale, where you recognize the gain over multiple years as you receive payments, potentially keeping you in lower tax brackets.

After struggling with a similar situation last year, I found this amazing service called taxr.ai (https://taxr.ai) that really helped clarify my options for S-corp real estate sales. I was freaking out about a potential six-figure tax bill after selling commercial property held in my S-corp, and my accountant wasn't giving me clear answers. The taxr.ai system analyzed my situation and showed me several strategies I hadn't considered - including the implications of installment sales versus 1031 exchanges for S-corps. They even helped me understand how my basis in the S-corp affected the tax consequences of the sale. What I really liked was that it wasn't just generic advice - the analysis was specific to my exact situation including the corporation structure, property values, and basis calculations. Saved me thousands and gave me so much more confidence going into the transaction.

Just wanted to follow up about my experience with taxr.ai from my question above. I was skeptical but decided to try it after continuing to get conflicting advice about my S-corp property sale. Their system actually identified that I had been miscalculating my basis in the S-corp because of how the previous losses were handled, which directly affected how much tax I'd owe on the property sale. It showed me that I had about $43K more in basis than I thought, which directly reduced my taxable gain. The analysis also showed me exactly how a 1031 exchange would work with my S-corp structure and gave me a step-by-step timeline to avoid missing any deadlines. I'm working with a qualified intermediary now and feel much more confident. Wish I'd known about this tool years ago before making the original mistake of putting real estate in the S-corp!

My advice - don't even bother trying to call the IRS about this. I spent literally WEEKS trying to get through to someone who could answer S-corp real estate questions. It was absolute hell. Then I found Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I needed specific guidance on how to handle an S-corp property sale with significant depreciation recapture issues. The agent I spoke with walked me through the entire process and confirmed exactly which forms I needed to file. They even sent me to a specialized department that handles S-corp issues. Before using this service I had wasted hours on hold just to get disconnected. This was literally the only way I could get actual answers directly from the IRS about my specific situation.

I have to admit I was completely wrong about Claimyr in my comment above. After continuing to get nowhere with my S-corp tax questions, I gave it a try last week. The service actually did exactly what it claimed - got me through to an IRS business tax specialist in about 20 minutes without me having to do anything. The agent confirmed that my accountant had been calculating the basis in my S-corp incorrectly for years, which would have caused major issues with the property sale reporting. The IRS agent walked me through the correct way to handle the accumulated losses on my Schedule M-2 and how they affected my ability to take distributions after the property sale. She also sent me specific IRS publications that addressed my situation. I'm still shocked this actually worked. The IRS guidance probably saved me from a future audit. Worth every penny just for the peace of mind.

One option not mentioned yet - have you considered a cost segregation study before selling? If you haven't been maximizing depreciation on the properties, you might be able to do a "catch-up" depreciation through a cost seg study and bonus depreciation. This could potentially create losses to offset some of the gains. It's a bit late in the game if you're selling soon, but might be worth looking into. You'd need a specialized engineering firm to conduct the study, but it can identify components of the real estate that qualify for shorter depreciation periods.

I made a similar mistake putting property in my S-corp years ago. When we sold, we got KILLED on taxes because of depreciation recapture. All that depreciation we'd been deducting for years got recaptured at ordinary income rates (not capital gains rates). If I could do it over, I would have: 1. Done a cost segregation study years earlier 2. Maximized my basis in the S-corp before the sale 3. Considered an installment sale to spread the tax hit Talk to a GOOD tax attorney who specializes in real estate transactions, not just a regular accountant. The fees will be worth it compared to the tax savings.

This is a complex situation that many S-corp owners face with real estate holdings. A few additional considerations that haven't been fully addressed: The $80K negative AAA balance won't directly offset your gains, but it's important for distribution purposes. Once you have positive earnings from the property sale, you'll need to be careful about how distributions are handled to avoid creating taxable income beyond the flow-through gains. Regarding timing strategies - if you haven't already signed a purchase agreement, consider whether you can structure the closing to occur early in the next tax year. This would give you more time to implement offsetting strategies and potentially spread estimated tax payments. Also, don't forget about state tax implications. Depending on your state, you might face additional taxes on the S-corp gains that could significantly impact your total tax liability. The suggestion about cost segregation is solid, but given your timeline, focus on whether you've been properly accounting for any land improvements or tenant improvements that might qualify for accelerated depreciation. One last thought - if you're keeping the S-corp for future ventures, make sure you understand how this large gain will affect your basis calculations for future years. It's not just about minimizing this year's taxes, but also positioning yourself properly for future tax planning. Definitely invest in a qualified tax professional who specializes in S-corp real estate transactions before you close. The complexity here warrants professional guidance beyond general advice.

Based on your situation, I'd strongly recommend getting a second opinion on whether you can still do a 1031 exchange. Many people assume it's too late once they've started sale discussions, but you actually have options until you close on the sale. The key is finding a qualified intermediary (QI) who can structure the transaction properly. They can often work with existing purchase agreements to modify them for 1031 compliance. Since your S-corp owns the property, the replacement property must also be acquired by the same S-corp entity. Another strategy worth exploring is a partial 1031 exchange combined with an installment sale for the portion you can't exchange. This could help you defer some gains while spreading the remaining tax impact over multiple years. Given the complexity and the significant tax implications ($175K in gains), I'd budget for both a specialized tax attorney consultation AND a qualified intermediary consultation before making final decisions. The combined fees will likely be a fraction of your potential tax savings. One more thought - if you've been claiming standard MACRS depreciation, there might be opportunities to accelerate depreciation in the current year through cost segregation or Section 179 elections on other business property purchases. Every dollar of additional depreciation directly reduces your taxable income. Don't let the complexity overwhelm you into inaction. You still have viable options to significantly reduce this tax hit with proper planning and professional guidance.

I've been through a similar situation with S-corp owned real estate, and I want to emphasize how critical it is to act quickly on the 1031 exchange option if you're considering it. The 45-day identification period starts the moment you close on your current property, not when you start thinking about doing an exchange. Here's what I learned the hard way: you need to have your qualified intermediary (QI) in place BEFORE you sign any purchase agreements. The QI needs to be a party to the original sale contract, or you'll need to assign your rights in the contract to them. You can't just decide to do a 1031 exchange after closing - the IRS is very strict about this. For finding a good QI, look for someone who is a member of the Federation of Exchange Accommodators (FEA) and has specific experience with entity-owned exchanges (not just individual exchanges). Ask them directly about their experience with S-corp exchanges and request references from similar transactions. One thing that hasn't been mentioned yet - if your S-corp has been taking depreciation on the properties, you'll face depreciation recapture at ordinary income tax rates (up to 25%) rather than capital gains rates, regardless of whether you do a 1031 exchange or not. The exchange defers the gain but doesn't eliminate the recapture entirely. Given your $175K projected gain and the complexity of S-corp taxation, I'd strongly recommend getting both a tax attorney AND a QI involved immediately. The consultation fees will be minimal compared to your potential tax savings, and time is working against you here. Don't make the same mistake I did of waiting too long to get professional help. The window for tax planning strategies closes quickly once you're committed to a sale timeline.

One strategy that hasn't been discussed yet is considering a charitable remainder trust (CRT) if you have any philanthropic goals. This could be particularly effective given your large capital gain situation. With a CRT, your S-corp could donate the appreciated real estate to the trust, receive an immediate tax deduction, and then the trust sells the property without paying capital gains tax. You'd receive income payments from the trust for a specified period (or life), and the remainder goes to charity. This strategy works especially well when you're facing a large one-time gain like your projected $175K. The immediate charitable deduction could offset a significant portion of other income, and you'd convert the lump-sum gain into a stream of income over time. The downside is that you don't retain ownership of the property, and there are minimum payout requirements and administrative costs. But given the size of your gain and the limited time for other strategies, it might be worth exploring alongside the 1031 exchange options. You'd need to work with an attorney who specializes in charitable planning, but the potential tax savings could be substantial. Even if you're not particularly charitably inclined now, you might find it attractive compared to writing a massive check to the IRS. Just another tool to consider as you're evaluating all your options. The key is getting professional advice quickly since most of these strategies require advance planning and can't be implemented at the last minute.