S Corp Related Party Tenant Improvements Reversion

Technical topics regarding tax preparation.
#1
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490
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10-Feb-2015 12:14pm
Location:
California
S Corp shareholder owns land. S Corp shareholder owns 80% of the S Corp stock and family members own rest. S Corp will rent land from 80% shareholder with a 20 year lease. S Corp will construct a building on the land with its own funds and will own the building and will pay a fmv rent to the landlord.

What happens at the end of the 20 year term? Is it income to the landlord if the building reverts to the landlord? Assume the lease is structured in a way such that the construction of the building is not in lieu of paying rent.

If the S Corp was an unrelated party the S Corp would claim an abandonment loss and the landlord would not have taxable gain but what about in this case? Are there any related party rules barring this same treatment?

What happens if S Corp Shareholder dies? Is a step up available for the building and land or just the land? See case below?

https://law.justia.com/cases/federal/ap ... 60/224518/

https://www.plantemoran.com/explore-our ... provements

https://www.colliers.com/en/news/housto ... provements

viewtopic.php?f=8&t=18179&p=158615&hilit=lease+tenant#p158615
 

#2
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724
Joined:
22-Sep-2014 9:25am
Location:
Farmington, Michigan
If shareholder dies, step up on assets owned by shareholder. For 80% shareholder, that would be the land and 80% of the corp stock.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#3
Posts:
2656
Joined:
28-Apr-2021 7:00am
Location:
FL
Consider a 20 year term interest instead of a lease. The steps could be as follows: (1) land owner declares he is holding the remainder interest as trustee of a taxable trust fbo an unrelated person (e.g., an in-law), (2) land owner sells a 20 year term interest to the corporation for an installment payments mirroring what would have been the lease payments.

The results would be (i) the corporation pays the mortgage, insurance and ad valorem taxes and improves the property, (ii) the corporation amortizes the term interest in the land, (iii) the corporation amortizes the building over the 20 year term, instead of the longer depreciation period, (iv) the land owner reports LTCG instead of ordinary rental income, (v) the improvements would not be taxable income to the trust, and (vi) the trust gets the improved property tax-free at the end of the term. Big income tax savings!
Steve
 


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