Here is a very common question- should real estate be placed inside of a corporation? The short answer is NO. Why not?? Because you are giving up one of the biggest tax advantages in the myriad of our country’s complex tax code. Tax advantages are very rare and should never be overlooked or ignored. Take them when you can!
Here are some scenarios to further explain the reasoning.
Let’s say that in 1980 real estate was purchased for $500k and was not placed inside of a corporation. It was either owned personally or held inside of an LLC that was taxed as a sole proprietor or partnership. Now fast forward to the year 2025 and it is worth $2mm fair market value. If it were sold at that price, there would be a taxable gain that must be recognized in the amount of $1.5mm (current selling price less original cost basis). This is simple and straightforward and shows the basics of how gain is recognized.
But now we will look at a little different situation.
Should the real estate be inherited in 2025 and subsequently sold, there would be much less tax due, if any, because of what is referred to as a “step up basis.” Upon inheriting the real estate, the basis would be increased from the original purchase price of $500k instead to the 2025 fair market value of $2mm. So, if the heirs were to sell the real estate for the current fair market value, there is no gain to be recognized and thus no tax triggered (sale price of $2mm less new stepped-up step basis of $2mm = $0 gain recognized).
Tax Advantage Removed?
Remember, in both of the scenarios above, the real estate was not held inside of a corporation. Now let’s look at why it is not a good idea to place real estate in a corporation and why a big tax advantage could likely be removed from the equation. In this scenario, the circumstances are changed slightly, and the real estate was placed into a corporation (S Corp or C Corp) when purchased in 1980. In the event of the death of the owner of the corporation, does the step up in basis apply to the heirs? Sure it does…but only to the stock value of the corporation and not the actual real estate. That’s right, assets held within the corporation do not receive the step up in basis. The tax situation could have been improved with better planning from the beginning.
In the case of a C corporation, the tax problem is even worse as the sale or distribution of the property would result in double taxation- the corporation would be subject to tax on the gain attributable to the sale or distribution and the shareholder would be taxed on either the distribution of thesale proceeds or the value of the property itself if distributed and not sold.
It should be noted that if you have real estate held inside of a corporation do not read this and then decide to remove it from the corporation. Distributing real estate or any other property from a corporation to shareholders will likely be a taxable event.
