Get real estate out of your corporation tax free

DO YOU HAVE real estate in your corporation? If so, raise your hand and then keep reading. About once a month, we get a call at the office asking a question something like this: "How can I get real estate out of my corporation without being taxed to death?"

Actually, we could write a small book about the various facts and circumstances that affect how you remove real estate from your corporation. The book would answer many questions. Stuff such as: Are you a C corporation or an S corporation? Are there retained earnings? And how much are they? How much has the real estate appreciated? And so on and so on.

Each additional fact might change the tax strategy needed to answer the question and to cover all the possibilities is beyond the scope of this column. Instead, let's set up the facts and circumstances that represent more than 95% of the calls we get and the recommended solution to get-thereal-estate-out-of-the-corporation problem. Here are the typical facts and circumstances.

Joe owns Success Co., a C corporation with a large amount of retained earnings and one or more pieces of real estate that have significantly appreciated in value. Most of the time the real estate has a building on it, but it could be vacant. (If Success Co. is an S corporation, it has a large amount of old C corporation earnings frozen in place and the same real estate facts.)

As you read what follows, keep in mind that you don't have to know how to build a car in order to drive one. Put it another way: Don't sweat the technical details; concentrate on the unbelievable favorable tax results.

Here's the process: Joe forms a family limited partner-ship outside Success Co. Then, Success Co. contributes vacant land (if the land is improved, Success keeps the improvements as leasehold improvements) to the FLIP. Let's say the land is worth $1 million (of course, it could be any amount). In exchange, Success Co. receives ownership of 99% of the FLIP interests. Joe contributes $10,000 in cash to the FLIP for a 1% general part-nership interest. As the general partner Joe has all the voting rights and makes all the decisions.

Success Co. leases the real estate from the FLIP for $100,000 per year.

An independent appraiser values the FLIP interest (after applying a 40% dis-count for general lack of marketability) at $600,000. Yes, the $1 million land is only worth $600,000 — because it is in the FLIP — for tax purposes.

Success Co. contributes 99% of its limited FLIP interests to a charitable lead trust with the following terms: The FLIP will pay $99,000 per year to the CLT for eight years. (Note: Typically the CLT then makes contributions to Joe's Family Foundation.)

Let's pause to follow the money. Success Co. pays $100,000 rent to the FLIP; the FLIP pays $99,000 to the CLT, which makes contributions to Joe's foundation.

But first some additional information. According to IRS tables, the value of the annuity (the $99,000 to be received for eight years by the CLT) is $569,000. So, the value of the 1% remainder interest (the part of the FLIP still owned by Success Co. immediately after the gift of the FLIP to the CRT) is only $31,000. (The $600,000 discounted value of the land, minus the $569,000 value of the eight-year annuity gifted to the CLT, leaves $31,000 as the value of the remainder interest.)

Simply put, Success Co. owns an asset that according to the IRS is worth $31,000. Joe's children buy the 1% remainder interest from Success Co. for $31,000.

After eight years the CLT ends. Joe's children, who are the beneficiaries of the CLT, receive and now own the 99% of the limited FLIP interests. Remember, they bought the other 1% from Success Co. eight years ago. The CLT and Success Co. are out of the picture.

Better yet, the real estate is out of the corporation, owned 100% by Joe's children. And there is a bonus: The real estate is also out of Joe's estate. The entire transaction is tax free to the FLIP, the CLT, Joe, the kids and Success Co. (although Success Co. might owe tax on the $31,000 sale).

Now one warning: The above is an easy way to get your real estate out of your corporation tax free. But you must use experienced advisers who know how to dot the "I's" and cross the "T's."

If you have a question (concerning how to get real estate — or other assets, particularly cash or securities — out of your corporation) you are welcome to call me at 847/674-5295 to discuss your exact situation.

Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; telephone 312/207-1040, or via e-mail at [email protected]