Classic Example of Double-Taxation with C Corps
Holding real estate in a C Corporation (or an LLC taxed as a C Corporation) is generally a very bad idea from a tax perspective.
Let’s assume the following facts:
- C Corp purchases real estate for $100,000 or owner/shareholder contributes $100,000 of real estate to a C Corp
- No capital improvements are made
- Real estate appreciates to $1,250,000
- The C Corp. has a taxable gain of $1,150,000 (sales proceeds of $1,250,000 less tax basis of $100,000)
- The Corp has a tax liability of $241,500 (21% of taxable gain).
- The Corp has slightly over a $1 million in its bank account that the shareholder wishes to invest in the stock market. The Corp distributes $1 million to the shareholder.
- The shareholder has received a taxable dividend distribution from the C Corp. The owner reports the $1,000,000 of dividend income and let’s assume that s/he files as married filing jointly. This income, subject to tax at the capital gains rate (20%) as well as being subject to the net investment income tax of 3.8%, would result in an additional tax liability of $238,000.