Skip to main content

You have several options if you are buying a new home and want to use your previous house for rental property.  One of these options is creating an S corporation. There are two huge reasons why you don’t want to simply convert it to rental property. These include:

  1. You won’t get to take advantage of the $250,000 (or $500,000 if you’re married) home-sale profit exclusion.
  2. You’ll have fewer tax deductions if you convert it directly since the depreciation basis will be lower.

If your home has appreciated since you first purchased it, you may be able to get both the exclusion ($250,000/$500,000) and a step-up in the depreciation basis when you sell your home to your S corporation. Please note that the S corporation is created by you. (More about that later.)

When you sell a home to your S corporation it triggers related rules that transform capital gain into an ordinary income. That appears to be a huge problem, but when we finish explaining the rules, you’ll understand how to avoid the problem. There are numerous considerations on your part, let’s take a look at them so you can achieve the financial and tax outcomes you desire.

house on a calculator

Image by Alexander Stein from Pixabay

4 Steps to Obtain a Tax-Free Gain

These four steps will make the gain on the sale of your home tax-free when you sell it to your S corporation.

Step 1: Form an S corporation. Make sure to keep this simple and inexpensive. Having your own S corporation gives you two tax pockets. You have a personal pocket and an S corporation pocket. Tax law sees your S corporation as a separate entity.

Step 2: Sell your home to your new S corporation. The sale should be used using a “contract for deed” or another instrument that is similar.

Step 3: Elect out of installment-sale reporting. When you elect out, the profits on the sale of your home are taxable immediately.

Step 4: Eliminate taxes. IRC Section 121 allows you to exclude $250,000 of profits from the sale from taxes. (That’s $500,000 if you are married and file jointly.) For example, if you sell your house to your S corporation for $400,000, it has a $400,000 basis since it’s going to turn it into rental property. The home-sale profit exclusion is $250,000. Using it helps you avoid paying taxes on the $200, 000 profit on the house.

S Corporation Funnels

An S corporation doesn’t pay federal taxes because it is a pass-through entity. It can be compared to a funnel. Income and expenses are put in at the top of the funnel. Then, the profits and losses that flow to the bottom are reported on your personal tax return. The S corporation will provide a K1 that will be entered on your taxes showing that you had profits and losses as an individual.  Some states apply taxes to S corporations. Most of them don’t affect the benefits you reap from using this strategy. However, you do need to know the requirements in your state before you choose to create the S corporation.

S Corporation Formation

There are two basic steps to forming an S corporation. You’ll form a “regular corporation” then choose an “S corporation” status. A lawyer is helpful. Keep the process simple, it doesn’t require a lot, but a lawyer is beneficial for helping you ensure everything is in proper order. They can keep your minute book and ensure the corporation is in good standing. Once you have incorporated, you will need to file IRS Form 2553 to choose S corporation treatment. It’s best to have your accountant or lawyer file Form 2553 for you. You’ll need to:

  • Make the S election effective for the tax year when the state recognized your corporation as a corporation.
  • Make sure to file the S election within two months and 15 days of the date you incorporated.
  • Choose a calendar year as the taxable year for your S corporation.

What about Cash?

If you need cash, you’ll want to refinance or obtain a second mortgage before you sell your home to your S corporation. Once the S corporation buys the home, it’s not yours anymore. Instead, the S corporation owns it.

What about the existing mortgage?

Some mortgages prohibit assumptions. Even worse, some have a “due on sale” clause that would require you to pay off the balance when you sell the home. You can avoid the “due on sale” clause by using a “contract for deed” or a wraparound mortgage. These keep the title from being transferred until the mortgage is paid off. That keeps the transaction just between you and your S corporation. You do not have to file any documents with authorities. Make sure to spend some time with a lawyer who understands real estate law, so you don’t get in a bind.

house that has a sold sign out front

Image by tkoch from Pixabay

Bona Fide Sale and Sales Price

Don’t try to sell your house to your S corporation for less than fair market value, it’s a sham. Make sure you can prove the fair market value at the time of the sale. Take steps to prove that the sale was not a sham. Most likely, you’ll need an appraisal.  Appraisers know how to value properties based on different purposes. The same piece of property may have different values based on the uses of the property and assumptions.

If you are carrying the mortgage, the S corporation needs to pay a down payment that is at least 10% of the purchase price. You will still need to follow the traditional sales methods including using a lawyer or title company to transfer the title. You’ll need title insurance, termite inspection, proration of taxes, and any other formalities consistent with your local real estate market.

Some Gain is Regular Income

When it comes to tax purposes, you and your corporation are related parties. As soon as you sell your home to your S corporation, you’ll trigger the related-party rule for depreciable assets. This rule changes capital gains into regular income. Selling your home involves both land and a building. Land is not depreciable, so it’s not subject to the rule. This means that the profit from the land sale is still capital gains.

Whether it’s considered capital gains or a regular income, you don’t want to pay taxes on it. This is where you use the $250,000 exclusion. It will help you avoid paying taxes on the sale of your home. The exclusion erases the taxable gain.

If your gains are more than the exclusion, you can still claim the exclusion and then:

  • Determine the ratio of the land to the building.
  • Apply the ration to the extra gain to find how much gain is attributable to the building and the land.
  • The extra gain that you can attribute to the land is treated as capital gains.
  • The extra gain that can be attributed to the building is ordinary income.

It’s Crucial to Elect Out of Installment-Sale Status

What if your gain on the sale is less than the home-sale exclusion? This should not be reported on the installment method for a few reasons:

  • You can exclude the gain by using the $250,000 (or $500,000) exclusion.
  • When you elect out – you make it clear that you are choosing to use the exclusion.
  • Electing out demonstrates that the exclusion replaces the Section 1239 ordinary income part of the sale.

You do not have to elect out of the installment-sale reporting to get these results. We just recommend it since it excludes the gain altogether. To elect out, simply use IRS Form 8949 to report the sale to your S corporation. Most of the time, you don’t have to report it when you sell your primary residence and there are no taxes due. However, electing out, in this case, helps prevent any misunderstanding.

Rental property remodeled by Telav Construction

By Telav Construction

Turn Your Home into Rental Property

Since you know the house so well, it makes a great rental property for your S corporation. You won’t run into a lot of surprises pf home remodeling that you might encounter if you purchased another piece of property for a rental. You’ll also have larger depreciation deductions because your S corporation has a stepped-up basis. If you choose to sell the property later, you’ll be selling a Section 1231 asset. If that happens over a year after your corporation purchased it, the gains on the sale will be capital gains, and any losses will be treated as ordinary losses. That gives you the “best of both worlds!”

What is an S-Corp?

An S Corporation (S Corp) is a business structure that allows taxable income, credits, deductions, and losses to pass directly to shareholders, providing advantages over C Corp. Limited to 100 or fewer shareholders; S-Corp is an alternative to LLCs. S-corps and LLCs, known as pass-through entities, pay no corporate taxes; shareholders are taxed. S corps offer incorporation benefits with partnership taxation, while LLCs are more flexible. S corp shareholders are individuals, specific trusts/estates, or certain tax-exempt organizations, whereas LLCs have fewer IRS restrictions, typically attracting sole proprietors or small professional groups.

Save on Taxes with an S-Corp

Choosing the right business entity is crucial for minimizing tax liability, and an S Corporation (S Corp) is a great option for small to medium-sized businesses. One key benefit is pass-through taxation, where profits and losses flow through to shareholders’ personal tax returns, avoiding double taxation seen with C Corporations. S Corps allows deductions for business expenses like salaries, wages, and bonuses, resulting in significant tax savings. Additionally, they may qualify for a 20% deduction on qualified business income under the Tax Cuts and Jobs Act of 2017, making them attractive for small business owners seeking tax savings.

What is an S Corp Salary?

An S-Corporation Salary refers to the fair compensation determined by the IRS for S-Corp owners, akin to wages in similar roles within comparable businesses. This reasonable salary is based on factors like industry standards, job responsibilities, training, and time commitment to the business. Methods for calculating this salary vary, from compensation analysis reports to the 60/40 rule, which divides income into 60% salary and 40% shareholder distributions. To avoid IRS issues, self-employed individuals and business owners must determine this fair salary carefully. The IRS mandates that S-Corp owners receive a reasonable salary for their work before taking additional profits as distributions, typically taxed at lower rates.

S Corp Salary Calculator

Use the S Corp Salary Calculator to easily determine reasonable compensation for your S-Corp. This online tool lets you input factors like industry and task allocation to find a suitable salary for S Corp owners. It offers valuable insights for IRS compliance and tax optimization strategies for small business owners.

xosotin chelseathông tin chuyển nhượngcâu lạc bộ bóng đá arsenalbóng đá atalantabundesligacầu thủ haalandUEFAevertonxosofutebol ao vivofutemaxmulticanaisonbethttps://bsport.fithttps://onbet88.ooohttps://i9bet.bizhttps://hi88.ooohttps://okvip.athttps://f8bet.athttps://fb88.cashhttps://vn88.cashhttps://shbet.atbóng đá world cupbóng đá inter milantin juventusbenzemala ligaclb leicester cityMUman citymessi lionelsalahnapolineymarpsgronaldoserie atottenhamvalenciaAS ROMALeverkusenac milanmbappenapolinewcastleaston villaliverpoolfa cupreal madridpremier leagueAjaxbao bong da247EPLbarcelonabournemouthaff cupasean footballbên lề sân cỏbáo bóng đá mớibóng đá cúp thế giớitin bóng đá ViệtUEFAbáo bóng đá việt namHuyền thoại bóng đágiải ngoại hạng anhSeagametap chi bong da the gioitin bong da lutrận đấu hôm nayviệt nam bóng đátin nong bong daBóng đá nữthể thao 7m24h bóng đábóng đá hôm naythe thao ngoai hang anhtin nhanh bóng đáphòng thay đồ bóng đábóng đá phủikèo nhà cái onbetbóng đá lu 2thông tin phòng thay đồthe thao vuaapp đánh lô đềdudoanxosoxổ số giải đặc biệthôm nay xổ sốkèo đẹp hôm nayketquaxosokq xskqxsmnsoi cầu ba miềnsoi cau thong kesxkt hôm naythế giới xổ sốxổ số 24hxo.soxoso3mienxo so ba mienxoso dac bietxosodientoanxổ số dự đoánvé số chiều xổxoso ket quaxosokienthietxoso kq hôm nayxoso ktxổ số megaxổ số mới nhất hôm nayxoso truc tiepxoso ViệtSX3MIENxs dự đoánxs mien bac hom nayxs miên namxsmientrungxsmn thu 7con số may mắn hôm nayKQXS 3 miền Bắc Trung Nam Nhanhdự đoán xổ số 3 miềndò vé sốdu doan xo so hom nayket qua xo xoket qua xo so.vntrúng thưởng xo sokq xoso trực tiếpket qua xskqxs 247số miền nams0x0 mienbacxosobamien hôm naysố đẹp hôm naysố đẹp trực tuyếnnuôi số đẹpxo so hom quaxoso ketquaxstruc tiep hom nayxổ số kiến thiết trực tiếpxổ số kq hôm nayso xo kq trực tuyenkết quả xổ số miền bắc trực tiếpxo so miền namxổ số miền nam trực tiếptrực tiếp xổ số hôm nayket wa xsKQ XOSOxoso onlinexo so truc tiep hom nayxsttso mien bac trong ngàyKQXS3Msố so mien bacdu doan xo so onlinedu doan cau loxổ số kenokqxs vnKQXOSOKQXS hôm naytrực tiếp kết quả xổ số ba miềncap lo dep nhat hom naysoi cầu chuẩn hôm nayso ket qua xo soXem kết quả xổ số nhanh nhấtSX3MIENXSMB chủ nhậtKQXSMNkết quả mở giải trực tuyếnGiờ vàng chốt số OnlineĐánh Đề Con Gìdò số miền namdò vé số hôm nayso mo so debach thủ lô đẹp nhất hôm naycầu đề hôm naykết quả xổ số kiến thiết toàn quốccau dep 88xsmb rong bach kimket qua xs 2023dự đoán xổ số hàng ngàyBạch thủ đề miền BắcSoi Cầu MB thần tàisoi cau vip 247soi cầu tốtsoi cầu miễn phísoi cau mb vipxsmb hom nayxs vietlottxsmn hôm naycầu lô đẹpthống kê lô kép xổ số miền Bắcquay thử xsmnxổ số thần tàiQuay thử XSMTxổ số chiều nayxo so mien nam hom nayweb đánh lô đề trực tuyến uy tínKQXS hôm nayxsmb ngày hôm nayXSMT chủ nhậtxổ số Power 6/55KQXS A trúng roycao thủ chốt sốbảng xổ số đặc biệtsoi cầu 247 vipsoi cầu wap 666Soi cầu miễn phí 888 VIPSoi Cau Chuan MBđộc thủ desố miền bắcthần tài cho sốKết quả xổ số thần tàiXem trực tiếp xổ sốXIN SỐ THẦN TÀI THỔ ĐỊACầu lô số đẹplô đẹp vip 24hsoi cầu miễn phí 888xổ số kiến thiết chiều nayXSMN thứ 7 hàng tuầnKết quả Xổ số Hồ Chí Minhnhà cái xổ số Việt NamXổ Số Đại PhátXổ số mới nhất Hôm Nayso xo mb hom nayxxmb88quay thu mbXo so Minh ChinhXS Minh Ngọc trực tiếp hôm nayXSMN 88XSTDxs than taixổ số UY TIN NHẤTxs vietlott 88SOI CẦU SIÊU CHUẨNSoiCauVietlô đẹp hôm nay vipket qua so xo hom naykqxsmb 30 ngàydự đoán xổ số 3 miềnSoi cầu 3 càng chuẩn xácbạch thủ lônuoi lo chuanbắt lô chuẩn theo ngàykq xo-solô 3 càngnuôi lô đề siêu vipcầu Lô Xiên XSMBđề về bao nhiêuSoi cầu x3xổ số kiến thiết ngày hôm nayquay thử xsmttruc tiep kết quả sxmntrực tiếp miền bắckết quả xổ số chấm vnbảng xs đặc biệt năm 2023soi cau xsmbxổ số hà nội hôm naysxmtxsmt hôm nayxs truc tiep mbketqua xo so onlinekqxs onlinexo số hôm nayXS3MTin xs hôm nayxsmn thu2XSMN hom nayxổ số miền bắc trực tiếp hôm naySO XOxsmbsxmn hôm nay188betlink188 xo sosoi cầu vip 88lô tô việtsoi lô việtXS247xs ba miềnchốt lô đẹp nhất hôm naychốt số xsmbCHƠI LÔ TÔsoi cau mn hom naychốt lô chuẩndu doan sxmtdự đoán xổ số onlinerồng bạch kim chốt 3 càng miễn phí hôm naythống kê lô gan miền bắcdàn đề lôCầu Kèo Đặc Biệtchốt cầu may mắnkết quả xổ số miền bắc hômSoi cầu vàng 777thẻ bài onlinedu doan mn 888soi cầu miền nam vipsoi cầu mt vipdàn de hôm nay7 cao thủ chốt sốsoi cau mien phi 7777 cao thủ chốt số nức tiếng3 càng miền bắcrồng bạch kim 777dàn de bất bạion newsddxsmn188betw88w88789bettf88sin88suvipsunwintf88five8812betsv88vn88Top 10 nhà cái uy tínsky88iwinlucky88nhacaisin88oxbetm88vn88w88789betiwinf8betrio66rio66lucky88oxbetvn88188bet789betMay-88five88one88sin88bk88xbetoxbetMU88188BETSV88RIO66ONBET88188betM88M88SV88Jun-68Jun-88one88iwinv9betw388OXBETw388w388onbetonbetonbetonbet88onbet88onbet88onbet88onbetonbetonbetonbetqh88mu88Nhà cái uy tínpog79vp777vp777vipbetvipbetuk88uk88typhu88typhu88tk88tk88sm66sm66me88me888live8live8livesm66me88win798livesm66me88win79pog79pog79vp777vp777uk88uk88tk88tk88luck8luck8kingbet86kingbet86k188k188hr99hr99123b8xbetvnvipbetsv66zbettaisunwin-vntyphu88vn138vwinvwinvi68ee881xbetrio66zbetvn138i9betvipfi88clubcf68onbet88ee88typhu88onbetonbetkhuyenmai12bet-moblie12betmoblietaimienphi247vi68clupcf68clupvipbeti9betqh88onb123onbefsoi cầunổ hũbắn cáđá gàđá gàgame bàicasinosoi cầuxóc đĩagame bàigiải mã giấc mơbầu cuaslot gamecasinonổ hủdàn đềBắn cácasinodàn đềnổ hũtài xỉuslot gamecasinobắn cáđá gàgame bàithể thaogame bàisoi cầukqsssoi cầucờ tướngbắn cágame bàixóc đĩaAG百家乐AG百家乐AG真人AG真人爱游戏华体会华体会im体育kok体育开云体育开云体育开云体育乐鱼体育乐鱼体育欧宝体育ob体育亚博体育亚博体育亚博体育亚博体育亚博体育亚博体育开云体育开云体育棋牌棋牌沙巴体育买球平台新葡京娱乐开云体育mu88qh88