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Ever Considered Selling Property To Yourself???
Selling property to your own S-Corporation can be beneficial in TWO specific situations. To Sell, or Not to Sell...
1.) You do not meet the requirements for excluding capital gains on the sale of your primary home

2.) You can not take advantage of depreciation on appreciated property

By selling to S-Corp, you can:
For Example:
You lived in a property for 3 years, and rented it out for the next 7 years. Since you haven't lived there for 2 of the last 5 years, you cannot sell the property as a primary residence and avoid the capital gain.
However, after moving out of the property, you sold it to your own S-Corporation, which allowed you to exclude capital gain because requirements for the primary residence two-year rule were met.

Take Advantage of the 2-Year Rule

The other advantage is:
For Example:
You purchased a home for $50k many years ago, and it is worth $500k now. If you decided to just rent it out, the basis for depreciation would be the original basis of $50k.
But, after selling it to your S-Corporation and then renting it out, you can depreciate the new basis of $500k.

new basis on the appreciated property
Clearly this will bring you substantial tax savings....

Save on Taxes

But be careful!
Selling to your S-Corp isn't for everyone!!!

Avoid this strategy if:
For Example:
You sell your primary residence with a gain of $240k to your S-Corp, and pay no tax due to the exclusion.
However, if you could not meet the exclusion, the $240k gain would be taxed at ordinary income tax rates... it would have been more beneficial to just sell the property and pay capital gains tax of 15% instead.

you cannot take advantage of the exclusion amount
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Post is included in group: Flipping Houses for Dummies!
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13 Comments on I'm Selling My House to Myself because of Uncle Sam!!!

JUN
19
2008

Beautiful post, great examples, and very well written.

I couldn't have done a better job myself.

Do you create your own blogs? How about the images?
1:07pm • #1

Mr. TaxMan! Of course I do it myself!

This one ended up taking me 3 hours to create, but it was well worth it.

I must agree, this is certainly among some of my more attractive posts... so I'll take that as a compliment!
1:14pm • #2
JUL
03
2008

My only concerns with S- corp are the additional tax fillings and accounting. This is a great point for the situations you mentioned.

Bonner
9:43am • #3

You are certainly right Bonner, a person should definitely take additional tax filings and accounting into consideration... Typically however, when a person uses this strategy (to avoid capital gain tax on upto $500K, potentially saving $75K), the benefits usually outweigh the costs.
2:38pm • #4
JUL
10
2008
220,273 Points

Great post and very well written - thanks for sharing!
7:36am • #6

My dad actually did that so he could rent out our old house. He saved quite a bit in taxes from it.
9:50am • #7
JUL
20
2008

That's great Carlos. Your dad, and less than 1% of the population knows that this strategy exists!
2:35pm • #8
143,139 Points 5 Featured Posts Outside Blog

You know that in a market like this where many people are keeping their homes as rentals rather than selling them, due to the market downturn, this could be very advantageous. Thanks for the information.
4:01pm • #9
JUL
22
2008

Great info! As for the tax exclusion on the profit from the sale of your home to the  S corporation, you don't have to worry about that if you purchase a new personal residence of equal  or higher value I think within 12 months.
10:38pm • #10
JUL
28
2008

Fred, that is a very good point. Certainly something to keep in mind when dealing with prospects.

Meli, I believe what you are referring to is a 1031 exchange in which proceeds from the sale are invested into another property - which defers tax liability. The circumstance I've outlined is a little different because we are dealing with a principal residence, not an investment property. Even if you are exchanging a primary residence for an investment property, you should certainly worry because taxes are being DEFERRED - they could come back to bite you.

As far as the tax exclusion goes, there are only 2 scenarios which will cause you to not worry about the tax bite:

1) You sold the home using the primary home exclusion, avoiding taxes on up to $500K gain (if married)

2) You sold the home using the primary home exclusion to your S-Corp, avoiding taxes on up to $500K gain (if married)

Any other situation - if you sold a home for a gain upto $500K - you are paying taxes. Whether now or 20 years from now, you will have a tax liability.

Hope that helps!
6:05pm • #11
AUG
13
2008
102,914 Points

Hey Niman,

I never though of an s-corp as a vehicle to use it as you described, this is good info.

Take care!

RJH
9:49am • #12

Robert, I'm happy to share the information, and I'm glad you liked the tip :)
2:54pm • #13
MAR
17

I chanced upon this very recently and I must say it is an invaluable advice and not too many others I have posed similar question to ever answered it correctly. My only question is, is there a document out there that clearly explains the kind of paperwork this entails and how on should go about it? Would you hire a real estate attorney to transact the deal or can it be done without one? Can it be done at the County level with the Title company perhaps?

 

Your answer would greatly help others like me.

 

Thanks
Vish
10:03am • #14

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Niman Singh

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