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Level 4
August 26, 2020

Shareholder Basis

  • August 26, 2020
  • 20 replies
  • 123 views

Hello,

I have a couple of questions regarding real estate investments in a S Corp:

1. Can someone please tell me if down payments on rental real estate increase shareholder basis?   

2. Also, what about closing costs paid out of pocket by shareholder and not the S Corporation?  Do they increase shareholder basis?

3. Are real estate investments reported on Form 8825?

Thank you!

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    20 replies

    sjrcpa
    Level 15
    August 26, 2020

    A. Real estate should not be held in a corporation.

    1. No.

    2. Will the corporation treat this as a loan from shareholder or contributed capital?

    3. Rental real estate activity (income and expenses) is reported on Form 8825.

    The more I know the more I don’t know.
    YoungCPAAuthor
    Level 4
    August 26, 2020

    Thank you!

    Re: #2:  I was thinking they would treat it as contributed capital.

    Also, I neglected to mention that this is an LLC electing to be taxed as an S Corp.  Does that change anything?

    qbteachmt
    Level 15
    August 29, 2020

    Lots to find out!

    Yes, just working on the 1120S now. 

    Makes accounting sense to treat the loan payments as distributions.  

    Do you happen to know of a thorough/helpful class on taxation for corporations?  I've tried some, but it can be difficult to get answers to questions like these.  I've taken Master CPE, but that was all self study.  I'd like to be able to ask questions of the presenter.

    I haven't found a mentor that can help with questions like this as of yet, but I'm trying.  Some people don't want to bother helping.  Oh well, I'll keep trying!

    Thank you for your help!


    @sjrcpa 

    Is it too late for them to revoke S Corp status for 2019?

    https://www.irs.gov/forms-pubs/revoking-a-subchapter-s-election

     

    Don't yell at us; we're volunteers
    qbteachmt
    Level 15
    August 26, 2020

    Basis is the initial cost of something, whether it is paid by funds, loans, or both. Since you describe that the real estate is owned by the Corp (as pointed out, this is a bad arrangement),  your shareholder has no basis in the real estate owned by the corporation.

    Let's not use the word Basis for the corporation/shareholder relationship for purposes of this discussion. Let's use the word Equity for "shareholder's investment in the corporation" and Liability for "the corporation owes something to someone."

    1. Downpayments are part of how something is being paid for, but are not what it cost. Funds are part of Assets (money on hand), even if it is borrowed money. Using money on hand as downpayment would reduce the amount needed to borrow to cover that cost. Think of the downpayment as part of the funds being paid, but the timing is different; they didn't pay in full all at once. Paid in Advance = downpayment. Until it gets applied, it still is the corporation's funds, so it is their Asset, whether still in their bank or in the hands of the escrow company waiting on closing. Then, money (the asset) gets invested into the property (the asset); this shows you nothing has changed from the perspective of the balance sheet. That amount as Value no longer is in the form of Money; it's now Property. Basis is nowhere in this paragraph. This paragraph is just the movement of Money.

    2. You didn't state if there is only this one shareholder. sjrcpa has the other part for your consideration and explanation to get the help you seek.

    Don't yell at us; we're volunteers
    YoungCPAAuthor
    Level 4
    August 26, 2020

    Thank you!  I'm still gathering more information from the client.  I might have an additional question.

    Also, I neglected to mention that this is an LLC electing to be taxed as an S Corp.  Does that change anything?

    qbteachmt
    Level 15
    August 26, 2020

    Here's the main issue: Payroll. They've made a bit of a mess.

    Don't yell at us; we're volunteers