1031 exchange for an S corp buying 2 properties

[jleo]

I have an Arizona single member LLC that files taxes as an S-corp "1120s" I sold that property and doing a 1031 exchange the issue I am having is because I file as an S corp I am told I need to purchase the new property with the exact same LLC. Well that LLC name matches the old property name and makes no sense for the new properties I am buying. I am looking at buying 2 properties so I would have to use that LLC for both properties and again the name matches the property I sold.

Question is how can I have new names for the new properties I am buying and I would like to have them in separate LLCs for liability standpoint. Can I create 2 new disregarded LLCs and have the 1031 LLC that files as an S corp be the member of those LLCs or would that disqualify my 1031?
Any help would be greatly appreciated!

[Wile E. Coyote]

Yes, you could have the S-Corp LLC can form an SMLLC and use that to acquire the replacement property.  You can also easily change the name of the old S-Corp LLC.

[SeattleCPA]

It is considered a really bad idea to hold real estate inside an S corporation. Or any corporation for that matter.

Some accountants joke there's an eleventh commandment, "Thou shalt not hold real estate inside a corporation."

Sounds like you've already got property "in" the corp. But you probably want to look at getting it out.

There are a handful of problems with this ownership structure:
1. You don't get the S corporation benefit with real estate. I.e., there's not payroll tax paid on real estate profits that you sidestep by using the S corp.
2. You pay for a more complicated 1120S return forever.
3. If you plan to hold the property until the Section 1014 step-up in basis, you need to assume your heirs and executor will have great, timely tax planning and compliance help because the sequence of valuing, extracting the property or selling it, and then liquidating the S corp needs to be done fast and correct.

[jleo]

It is considered a really bad idea to hold real estate inside an S corporation. Or any corporation for that matter.

Some accountants joke there's an eleventh commandment, "Thou shalt not hold real estate inside a corporation."

Sounds like you've already got property "in" the corp. But you probably want to look at getting it out.

There are a handful of problems with this ownership structure:
1. You don't get the S corporation benefit with real estate. I.e., there's not payroll tax paid on real estate profits that you sidestep by using the S corp.
2. You pay for a more complicated 1120S return forever.
3. If you plan to hold the property until the Section 1014 step-up in basis, you need to assume your heirs and executor will have great, timely tax planning and compliance help because the sequence of valuing, extracting the property or selling it, and then liquidating the S corp needs to be done fast and correct.

Being it is passive income I should not have to pay self employment tax but my CPA tells me I should still pay myself a wage even though I am not doing anything and it is all passive income?

His theory is because it is an S-corp you need to have a salary come out or you run a risk of being audited. It just doesn't make sense to me as it is passive income and they should see all income reported on the 1120s is passive.

[SeattleCPA]

It is considered a really bad idea to hold real estate inside an S corporation. Or any corporation for that matter.

Some accountants joke there's an eleventh commandment, "Thou shalt not hold real estate inside a corporation."

Sounds like you've already got property "in" the corp. But you probably want to look at getting it out.

There are a handful of problems with this ownership structure:
1. You don't get the S corporation benefit with real estate. I.e., there's not payroll tax paid on real estate profits that you sidestep by using the S corp.
2. You pay for a more complicated 1120S return forever.
3. If you plan to hold the property until the Section 1014 step-up in basis, you need to assume your heirs and executor will have great, timely tax planning and compliance help because the sequence of valuing, extracting the property or selling it, and then liquidating the S corp needs to be done fast and correct.

Being it is passive income I should not have to pay self employment tax but my CPA tells me I should still pay myself a wage even though I am not doing anything and it is all passive income?

His theory is because it is an S-corp you need to have a salary come out or you run a risk of being audited. It just doesn't make sense to me as it is passive income and they should see all income reported on the 1120s is passive.

That's probably reasonable. The idea of paying a salary for your work managing the S corp, I mean.

This then becomes another cost to holding the real estate inside an S corporation obviously.

BTW you really ought to think about liquidating the S corp (or making an entity classification election using a Form 8832 that changes the classification of the LLC from S corp to disregarded entity.). If you've got gain on the property, that gain will be passive probably. Which means you can shelter it pretty easily with accelerated depreciation and bonus depreciation on the replacement property. And that should or may mean you can get out from under the S corp thing without paying much tax.

FYI, I love S corporations. It's my practice specialty. But they don't make sense for real estate.

[jleo]

It is considered a really bad idea to hold real estate inside an S corporation. Or any corporation for that matter.

Some accountants joke there's an eleventh commandment, "Thou shalt not hold real estate inside a corporation."

Sounds like you've already got property "in" the corp. But you probably want to look at getting it out.

There are a handful of problems with this ownership structure:
1. You don't get the S corporation benefit with real estate. I.e., there's not payroll tax paid on real estate profits that you sidestep by using the S corp.
2. You pay for a more complicated 1120S return forever.
3. If you plan to hold the property until the Section 1014 step-up in basis, you need to assume your heirs and executor will have great, timely tax planning and compliance help because the sequence of valuing, extracting the property or selling it, and then liquidating the S corp needs to be done fast and correct.

Being it is passive income I should not have to pay self employment tax but my CPA tells me I should still pay myself a wage even though I am not doing anything and it is all passive income?

His theory is because it is an S-corp you need to have a salary come out or you run a risk of being audited. It just doesn't make sense to me as it is passive income and they should see all income reported on the 1120s is passive.

That's probably reasonable. The idea of paying a salary for your work managing the S corp, I mean.

This then becomes another cost to holding the real estate inside an S corporation obviously.

BTW you really ought to think about liquidating the S corp (or making an entity classification election using a Form 8832 that changes the classification of the LLC from S corp to disregarded entity.). If you've got gain on the property, that gain will be passive probably. Which means you can shelter it pretty easily with accelerated depreciation and bonus depreciation on the replacement property. And that should or may mean you can get out from under the S corp thing without paying much tax.

FYI, I love S corporations. It's my practice specialty. But they don't make sense for real estate.

I am thinking of buying 1 property under the S corp and paying tax on about 350k worth of gains out of a 1031 to get 2nd property out of that S corp so I don't keep kicking the can down the road. Also I believe by me paying tax on the 350k it will increase my cost basis on the first property that still remains in the S corp by 350k since I am not 1031 that portion. Basically pay 350k in tax now to avoid 2 properties in the S corp down the road and have only one in the S corp which I will probably never sell that property anyways. What is your thoughts?

[SeattleCPA]

I'd think it's far more efficient to take both properties out of the S corp.

If you want to shelter some or all of that gain, think about using cost segregation studies to put a giant depreciation deduction on this year's tax return.

E.g., pay the $7K or whatever to get a study that says you can depreciate $300K this year and thereby shelter the income.

I don't think you get the bump in basis of the remaining S corp property. But maybe I don't understand what you're saying.

[jleo]

I'd think it's far more efficient to take both properties out of the S corp.

If you want to shelter some or all of that gain, think about using cost segregation studies to put a giant depreciation deduction on this year's tax return.

E.g., pay the $7K or whatever to get a study that says you can depreciate $300K this year and thereby shelter the income.

I don't think you get the bump in basis of the remaining S corp property. But maybe I don't understand what you're saying.

I am thinking of keeping 1st property in exchange in the S-corp that property is 2,100,000 and then take the remainder 400k from the 1031 and pay tax on it and just buy the 2nd property outside the exchange and use personal funds and the 400k boot from the 1031 to purchase it so I do not kick the can down the road on the new property. The property I keep in the s-corp will most likely stay in there forever the only issue I see there is extra cost every year filling it as an S-corp. I was told I should be fine not paying self employment as it is passive and nothing will even be listed on the first page of the 1120s as its all rental income.