Can You Put Real Estate Inside an S Corporation? | USTaxAid

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Can You Put Real Estate Inside an S Corporation?

Written by Diane Kennedy, CPA on May 22, 2023

I’ve mentioned all the reasons not to put an appreciating asset like real estate in C Corporation. But, what about an S Corporation? Does it make sense to put real estate inside an S Corporation?

I’ll cover the two main reasons why you do NOT want to put your property inside an S Corporation and then give you the solution that works in almost every case.

First, let’s look at why it doesn’t make sent to put your real estate inside an S Corporation. There are two main reasons:

(1)     Assets are pretty much locked inside the S Corp, once you put them inside. If you later change your mind and want to move them out, you have to do so at fair market value. If it’s an appreciating assets like real estate or, hopefully, stock, it’s gone up in value and it will be distributed at fair market value. That means you pay tax on the gain even if all you’re doing is moving the asset out of the S Corporation.


(2)     Your heirs forego stepped up basis adjustment on assets within an S Corporation. Let’s say you have real estate with a basis of $100,000 that is now worth $500,000. If that property was held in your name, inside an LLC or inside a partnership, your heirs would get a stepped-up basis to $500,000. That would mean more write off and much less taxable gain when it sells.

If it’s within an S Corporation, assets do not go up in value upon your death. Your heir inherits the property with a basis of $100,000.

For those reasons, I’m not a fan of having your S Corporation own property.

The Best Structure for Real Estate

In most cases, the best structure for real estate will be an LLC. In all but Florida (and sometimes Arizona and Colorado), a single member LLC will give you asset protection and avoid the S Corporation problems.
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