For most tax practitioners, this would elicit the following Pavolovian reaction: “You should NEVER put real estate inside a corporation.” And while there are very few NEVERS in the tax world, this one is pretty darn accurate.But do you really understand why you should never put real estate into a corporation?As you might imagine, this can lead to painful consequences when doing business as a C corporation. As advisors, we keep an army of axioms always at the ready to be used in response to client queries.Sometimes in life, when faced with a given situation, we say things simply as a matter of reflex. ” “You have a lovely home here.” “You’re a great gal, I’ll call you sometime. Take, for example, the client who contemplates the type of entity that should be used to hold a piece of real estate.All of this happens automatically by operation of law according to each state's entity conversion statute. Of course, nothing is quite so simple when law and taxes are involved, and both come into play when a business is converted to a new legal form.
Here are the three conversion categories: Each of these conversion methods can have a different effect on the corporation's tax basis and holding period in the assets it receives.
Just check the appropriate boxes on the conversion form, add some simple boilerplate as explained in the instructions to the form, file the form, and you're done.
The new business is formed, the assets of the old business are transferred to the new business, and the old business is dissolved.
Effectively connected earnings and profits are decreased for a US reinvestment, creating an increase in US equity from previous to current year.
In effect, the dividend equivalent amount is calculated as the effectively connected earnings and profits, less the increase in US equity. In computing A's dividend equivalent amount for 2011, A's ECEP of 0 is reduced by the 0 increase in U. net equity between the close of 2010 and the close of 2011. Ultimately, it is advisable from a tax standpoint to continue US reinvestment in order to avoid this second layer of taxation.
State entity-filing offices -- typically a division or department of the office of the Secretary of your state -- have made it simple to convert one type of entity to another.