THIS WEEK'S STORY
Don’t Move Real Estate Into an Entity Until You Check These Five Things
A business owner buys a building personally. The business grows, and someone recommends moving the property into an LLC or corporation for “better protection.”
They prepare a deed, record the transfer, and assume the job is done.
That simple move can create a complicated tax problem.
First, an LLC and a corporation are not the same thing. An LLC is a legal structure, but its tax treatment depends on how it is classified. A single-member LLC may be disregarded for federal tax purposes. A multi-member LLC is generally taxed as a partnership unless it makes another election. An LLC can also elect to be taxed as an S corporation or C corporation.
That distinction matters.
Moving property into a disregarded LLC may have little federal income-tax impact. Moving it into a partnership or corporation may qualify as a tax-deferred contribution, but only if specific requirements are met.
Debt creates another trap. If the new entity assumes a mortgage, the owner’s tax basis and share of the debt must be reviewed. In certain situations, debt exceeding basis can trigger taxable gain—even when no cash changes hands.
California adds another layer. The transfer may require change-of-ownership reporting and could trigger property-tax reassessment or local transfer taxes. The lender may also treat the deed transfer as a violation of the loan agreement. Insurance coverage and title records must be updated.
The biggest warning is appreciated real estate inside a C corporation. Getting the property into the corporation may be tax-deferred. Getting it back out can create tax at both the corporate and shareholder levels. A property transferred casually today could become trapped in the wrong structure for years.
Asset protection matters. But the tax structure, financing, insurance, and eventual exit must work together.
