What Happens to Real Estate Loss Carryforwards if You Change Entities?


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real estate carryforward

There are a few areas that our firm has a lot of time and education in: real estate tax, online businesses, offshore tax for US taxpayers, and foreign nationals investing in the US. Sometimes that means that other tax professionals ask questions. Here is one that we received at our website.

Q: I have client with suspended PAL LLC losses. Two of the LLC entities with suspended losses have converted to C-corp status. Client continues to own as C-corp stock. What is the proper treatment of those suspended losses? Do the losses become part of the C-corp basis?

A: My first concern is whether electing C Corp status is really the best thing. Generally, you don’t want to have appreciating assets inside a C Corporation status. That’s because when the assets are sold, the gain is taxed at ordinary tax rates, not capital gains rates. The tax is higher. Then, when the cash is distributed, it’s subject to tax as a dividend. So, there is a second tax.

That’s why we almost always want to use a partnership or LLC to hold real estate.

In answer to the question, though, the carryforward losses are carried by the individual members (if a disregarded multi-member LLC) or member (if a disregarded single-member LLC).

At some future time, there might be passive income to offset the losses. Or, if the individual taxpayer’s AGI drops below $100K, you can start taking $25K per year in the suspended losses against other income.

Otherwise, if the property is now inside the C Corp, the suspended losses will not be used when the property is sold.



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