Crucial Tax Tips for Landlords #9

Sell Property To Yourself
submitted by Brian L.

MonopolySelling property to an S-Corporation may be beneficial in some specific situations, like if you are trying to meet requirements for the two year rule ($250/500k exclusion), or if you are trying to take advantage of depreciation on appreciated property.

For example, say you lived in a property for three years, and rented it out for the next seven years – since you haven’t lived there for two out of the last five years, you cannot sell the property as a primary residence to avoid the capital gain.

However, after moving out of the property, you sell it to your own S-Corporation, which allows you to exclude capital gain (up to $250k, $500k if married filing jointly) because requirements for the two-year rule have been met. The other advantage is you can have a new basis for depreciation on your appreciated property.

Say you purchased a home for $50k many years ago, and it is worth $500k now. If you decided to rent it out, the basis for depreciation would be the original basis of $50k. But after selling it to your S-Corporation, you can depreciate the new basis of $500k. Clearly this will bring you substantial tax savings.

Selling to your S-Corp isn’t for everyone though. You should avoid using this strategy if you cannot take advantage of the exclusion amount. For example, you sell your primary residence with a gain of $240k to your S-Corp, and pay no tax due to the exclusion. However, if you did not meet the exclusion, the $240k gain would be taxed at ordinary income tax rates, and it would have been more beneficial to just sell the property and pay capital gains tax of 15% instead.

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