I have stock in an S corporation and the corporation is about to sell some real estate which has been owned by the company for several years.

The property has appreciated in value significantly.

Will this be taxed as a capital gain or will it be taxed as income to the shareholders?

Unless you are in the business of buying and selling real estate (meaning this was inventory), then it will be capital gains to the shareholders.

I sure hope this is correct because i have talked to 2 accountants. One said to it was capital gains and other said it was taxable income. And we are not in real estate business.

RicoShagnasty said:

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I have stock in an S corporation and the corporation is about to sell some real estate which has been owned by the company for several years.

The property has appreciated in value significantly.

Will this be taxed as a capital gain or will it be taxed as income to the shareholders?

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Your question is confusing. The gain is certainly taxable to you. The question should be "Is the gain taxed at capital gain rates or ordinary income rates?

Thank you for spelling that out...I believe it was obvious what I was asking.

gigemhilo said:

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Unless you are in the business of buying and selling real estate (meaning this was inventory), then it will be capital gains to the shareholders.

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This is the correct answer. Not sure if just land or land and improvements but to the extent there was depreciation on improvements there is an addition quirk in the taxation of the gain.

30wedge said:

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gigemhilo said:

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Unless you are in the business of buying and selling real estate (meaning this was inventory), then it will be capital gains to the shareholders.

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This is the correct answer. Not sure if just land or land and improvements but to the extent there was depreciation on improvements there is an addition quirk in the taxation of the gain.

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Exactly. Normally, if there was property that was depreciated then the answer is both. Most of what you consider to be "profits" will be capital gains. The bonus surprise kick in the rear is depreciation recapture, which will be based on regular income tax bracket. Also have to factor how state handles cap gains. For instance, in CA there is no capital gains tax, it's simply taxed as regular income. Also consider the 3.8% Obama tax as well (if applicable).

WoMD said:

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30wedge said:

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gigemhilo said:

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Unless you are in the business of buying and selling real estate (meaning this was inventory), then it will be capital gains to the shareholders.

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This is the correct answer. Not sure if just land or land and improvements but to the extent there was depreciation on improvements there is an addition quirk in the taxation of the gain.

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Exactly. Normally, if there was property that was depreciated then the answer is both. Most of what you consider to be "profits" will be capital gains. The bonus surprise kick in the rear is depreciation recapture, which will be based on regular income tax bracket. Also have to factor how state handles cap gains. For instance, in CA there is no capital gains tax, it's simply taxed as regular income. Also consider the 3.8% Obama tax as well (if applicable).

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The gain to the extent of depreciation on real property would be taxed at a 25% rate not as regular income. And good point on the 3.8% Obama tax

Hmm really? I'm happy to be corrected on this as I have CRE I'm selling soon. So many levels of taxation it's amazing. But still pales in comparison to my business sale earlier this year.

Rico,

I believe the rate on the real property gain would be:

Depreciation taken in excess of straight line = ordinary income rate
Straight Line Depreciation = max 25% rate (unrecaptured Section 1250 gain)
Remainder = L.T. Capital Gains rate = max 20% rate

And like the guys said, don't forget your 3.8% Obamacare tax (NIIT) if you're clocking over $200K on your return.

The corporation will pass through the gain to its shareholders as a separately stated item on the K-1s, so they will have the pleasure of paying it.

BTW, were you ever a 'C' before becoming an 'S'? If so, you may not be done just yet.

30wedge said:

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WoMD said:

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30wedge said:

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gigemhilo said:

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Unless you are in the business of buying and selling real estate (meaning this was inventory), then it will be capital gains to the shareholders.

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This is the correct answer. Not sure if just land or land and improvements but to the extent there was depreciation on improvements there is an addition quirk in the taxation of the gain.

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Exactly. Normally, if there was property that was depreciated then the answer is both. Most of what you consider to be "profits" will be capital gains. The bonus surprise kick in the rear is depreciation recapture, which will be based on regular income tax bracket. Also have to factor how state handles cap gains. For instance, in CA there is no capital gains tax, it's simply taxed as regular income. Also consider the 3.8% Obama tax as well (if applicable).

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The gain to the extent of depreciation on real property would be taxed at a 25% rate not as regular income. And good point on the 3.8% Obama tax

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This is correct on 1250 gain (real estate)