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.
As you can see from this simple example, the taxable gain from the sale of the real estate is taxed twice – once at the corporate level and a second time when the proceeds are distributed to the shareholder.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
