I am a CPA in need of some assistance. I am trying to account for the situation below correctly on the tax return, but haven't dealt with this circumstance before and want to make sure we get it reported correctly.

S-Corp has 2 owners, husband and wife. They owned the building they operate their business in and it was encumbered by debt. They decided to refinance the property into a Partnership, same ownership, in July 2015.

At the time of refinancing, the property had an adjusted basis of:

Building - $343,123
Improvements - $32,088
Total Adj Basis - $375,211

The notes outstanding were for $448,606 (mortgage) and $75,863 (LOC secured by building).

The property was refinanced into the Partnership for $527,869 (mortgage and LOC, and $3,400 closing costs), and a floating line of credit with availability of $82,131 that was available to advance on upgrades, etc.

I'm trying to determine if there are any current tax consequences on the refinance since there is basically a "built-in gain" of $130K since the refi exceeds the basis.

To further muddy, they have since sold this building in 2016 about a week ago where the gains from sale will be recognized.

I'm trying to get some advice from other CPA or tax guru who have dealt with similar circumstances in the past? The client of course did not consult prior to making this transaction as I would have told them it wasn't worth the time since both entities were already an LLC.

-Corp has 2 owners, husband and wife. They owned the building they operate their business in and it was encumbered by debt. They decided to refinance the property into a Partnership, same ownership, in July 2015.==>>>>>>>>>>>>>> This is a tough question to answer.I guess you need to know What type of property they want to transfer, and why ?? or has the LLC elected to be taxed as a corporation, , for tax purposes, as a partnership or C-corp/ an S corp?? you need to take a look at the purpose of the transfer. Why exactly are you thinking of transferring assets from the S corp you already own to the LLC you own? This is an important question to ask as this type of action can lead to significant legal and tax consequences if done improperly. For example, say,the financial condition of the entities is also an important factor to consider. If the company you would like to transfer assets out of is facing bankruptcy or dissolution, a transfer could be viewed as a way of hindering the collection claims process of the creditors or etc.. ALSO, Will the LLC receiving the pty be providing any sort of consideration (i.e. payment) for the new assets received? If you have members involved in the company then they will likely want to be compensated for any transfer.

they owned their rental property with the S-Corp. However, no lender was going to write a loan directly to the S-corp. they had to take the loan out in their name(s) as president of the corp. All of the business of operating the rental property come from the business account and the S-Corp filed .


At the time of refinancing, the property had an adjusted basis of:

Building - $343,123
Improvements - $32,088
Total Adj Basis - $375,211

The notes outstanding were for $448,606 (mortgage) and $75,863 (LOC secured by building).

The property was refinanced into the Partnership for $527,869 (mortgage and LOC, and $3,400 closing costs), and a floating line of credit with availability of $82,131 that was available to advance on upgrades, etc.

I'm trying to determine if there are any current tax consequences on the refinance since there is basically a "built-in gain" of $130K since the refi exceeds the basis.======>>>>>>>>>>>>Basically, I think that there is no BIG ; BIG,as you can see, is a term used by the IRS to describe gain that must be recognized by a corp in addition to its shareholders. Built-in gain applies to corps previously taxed under Subchapter C of the IRC that elect taxation under Subchapter S and whose ASSETS VALUE, (I mean , in this particular situation it is not asset value appreciation but it might be just a gain), APPRECIATED before the election was made or corps that acquire assets with carry-over basis from a predecessor C-Corp.However, in this situation, they can sell assets for fair market value from the S corp to the LLC. How they do this depends on the type of entity. They cannot just move assets from the S corp to the LLC. Also, how they do the transfer depends on the type of entity. Each entity (if they are registered LLCs or corps) is a separate legal entity and needs to be treated as such to avoid having the assets and liabilities of the entities and possibly theirs as well from being treated as the same. They need to treat each entity separate with separate assets and separate accounting. Otherwise, there is no reason to have separate entities. An arms-length sale of the assets is generally the best way to proceed as it will hopefully avoid having the assets/liabilities of one business transmuted to the other business. There is significant risk associated with doing the transfer improperly, as the liabilities of one company could be deemed to be liabilities of the other, and if the assets are not properly transferred it may make one or more of the companies very difficult to sell in the futureyu may talk to a business lawyer in the area about how to do this.



To further muddy, they have since sold this building in 2016 about a week ago where the gains from sale will be recognized.====>>>>>>>>>>>removing pty from an S corp is a tax event; Asset sales, including require assigning valuations to all of the assets of the S corp can trigger ordinary income tax liabilities at higher rates in addition to capital gains tax liabilities. Consequently, estimating your ordinary income and capital gains tax liabilities on the sale of an S corp becomes more complicated.

The transaction was all done adequately. Their purpose was primarily to separate the building from the 1245 assets (such as delivery trucks, etc) to shield their liability on the 1250 property...at least that is my interpretation in tax talk.

Both companies are LLC...one is an S-Corp, the original mortgage holder, and the other is a partnership, the refinance holder.

My biggest question was pertaining to the gap between the refi and the ABV/original mortgage. There is a large gap in terms of the liabilities to assets and this is the piece that I questioned as far as any form of gain we'd have to recognize. I don't see how they would be able to step up the basis to refinance, since the property has already been depreciated, unless they recognize gain on the refinance under the S-Corp LLC. I guess that would boil down to would it be wiser to recognize that piece of the gain in 2015, and the remaining in 2016 after marking the property to FMV.

I'm just trying to garner some more insight into this and learn from other CPAs. It's a rather convoluted and messy tax situation that never should have happened if they had consulted prior doing.

Thanks again for the help.