Construction & Real Estate

While the majority of real estate assets are held in entities taxed as partnerships, it’s not uncommon to see closely held properties owned in S corporations. While these entities have their advantages, in the real estate industry, these tax structures create more unintended tax consequences than benefits. The disadvantages of S corporations include stringent ownership and allocation/distribution rules, loss and distribution limitations, issues getting property into the S corporation, inability to get the property out of the S corporation without triggering tax, limited ability to execute 1031 exchanges in situations when one or more parties want to cash out and no step-up in basis when there is a transfer of ownership or death of a partner.

Ownership, Allocations and Distributions:

• S corporations can only be owned by individuals and certain trusts, which severely limits ownership options for larger properties that are often owned by multiple tiers of partnerships.
• Allocations and distributions must be pro rata according to ownership.
  
  • No carried interests
  • Difficult recapitalization of distressed properties where preferred equity is often involved
  • No special allocations of depreciation deductions

Read the entire article.