Real Estate in an S Corporation?

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I came across this awhile ago – people taking title to real estate in the name of an S Corporation, and then trying to get around the “due on sale” clause at a later date by simply transferring the shares of the S Corporation to a new owner. It’s the same game as the Land Trust – where the property title stays static, while the property owners change behind the scenes.

But in this case, my first thought was “Why would you want to compromise your asset protection strategy?”

With the exception of Nevada, no other state provides Charging Order protection over S Corporation shares. So if you wind up on the losing end of a lawsuit and can’t pay the damages, your shares in that S Corp are up for grabs to your creditors … meaning everything IN your S Corp is fair game as well. That doesn’t happen with LLCs and LPs (at least not in most states). Your LLC/LP interests are not readily available – if they are at all. Even in states that don’t have a legal prohibition against seizing LLC/LP interests, there is still a lengthy court procedure to go through before a creditor can foreclose on those interests.

The funny thing was, the person telling me about this idea (who was quite in favor of it btw) was a CPA. Yet I have always thought that there were negative tax consequences, even in an S Corporation, where appreciating real estate was involved. With an S Corp, the taxation is flow-through, but there’s also an implication that close to half of the income will come out through payment of a salary – with it’s associated payroll taxes. Under an LLC/LP, as long as the income is truly passive in nature it will be taxed that way – meaning no payroll taxes.

At the end of the day I just don’t see how the pros of this “solution” outweigh the cons. If anyone’s got some insights, let’s have them!

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