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Suppose you are concerned about potential lawsuits and you have appreciated real estate in your (operating) corporation. Perhaps the real estate is in the corporation because when you took title you simply did not realize (or care) that it would be exposed to creditors. Or maybe you wanted to avoid paying sales tax if you owned the real estate personally and leased it to the corporation. Either way, you’re not happy about it now. You want to get the real estate out of the corporation. The problem is that you learned that deeding the real estate from the corporation to you is considered a taxable sale at fair market value. That will trigger a big tax.

So, after talking it over with your golf buddies, who didn’t have a clue either, you made an appointment with your lawyer & CPA. After listening to them for an hour or so, you shrugged your shoulders, said (X%#&X) to yourself and hoped that someone would come up with a viable solution.

Well, a relatively new set of IRS Rulings does just that. The new technique will allow the transfer of the appreciated real estate out of your corporation without triggering income taxes. After the dust settles, you end up with a parent company  which owns two companies, one of which is an operating corporation and the other owns the real estate. That is, the real estate is separated from the operating corporation.

Unfortunately, we are not yet finished. You are beginning to actually protect your real estate from that potential lawsuit. But there is an additional, necessary step.

The problem is that in many cases you can expect the lawsuit to be filed against both you and the operating corporation. Since you own the Parent and the Parent owns the real estate company, the plaintiff, if he wins, can seize the Parent and get the real estate.

To avoid that result you must shift ownership of the Parent, say to your spouse or to you and your spouse as tenants by the entireties, or even to a trust for the benefit of your family. That will protect the Parent from seizure to pay a judgment against you.

Part of the beauty of the technique is that it allows the operating corporation to operate as before. It keeps all of its contracts, licenses, etc. and the same identification number. A downside, of course, is that sales tax will be due on the lease of the realty to the operating company.  (However, there are ways to avoid that sales tax, which are outside the scope of this article.)

Needless to say, there are some technical issues and traps for the unwary.  But all in all, it often can be a compelling technique to explore.


©2010 Steven M. Chamberlain. All rights reserved. Republication with attribution is permitted.