S-Corporation Cash-Out Break-Ups and Code Sec. 1031 Exchanges
6 Pages Posted: 17 Oct 2018
Date Written: October 3, 2018
Many legacy S-Corporations (those with real property purchased before the advent of LLCs) still own real property with the prospect of selling or transferring it as part of a generational change in ownership. With such dispositions, the owners may have different objectives for the use of the property’s sale proceeds and may wish to part ways. Many tax advisors are familiar with techniques that apply to similar types of break-ups of partnerships and LLCs, which allow some parties to exchange property tax free under Code Sec. 1031 while others cash out. S-Corporation break-ups are taxed differently from partnership and LLC break-ups, so the same types of transactions that are tax-free in the partnership or LLC context could trigger gain recognition for members of S-Corporations. This article presents the rules governing S-Corporation break-ups and illustrates how some cash-out break-ups of S-Corporations can trigger gain recognition for all members, including those who wish to do a Code Sec. 1031 exchange with their shares of the sale proceeds. The article also identifies some planning techniques that might be available in some situations to help mitigate the effects of the taxable S-Corporation break-up.
Keywords: section 1031, S-corporations, S-corporation divisions, nonrecognition, gain deferral, drop-and-swap, swap-and-drop
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