Here's a great way to take up to $500,000 out of your corporation absolutely and legitimately --- TAX FREE.
Let's assume that you've outgrown your principle residence and want to move into another one. Instead of following the normal routine of putting your house up for sale and waiting for a buyer, why not consider selling your house to your corporation?
Selling your personal residence to your corporation is one of the smartest tax decisions you can make. Not only is it an excellent way to pull money out of your corporation TAX FREE, but it's also a great way to give yourself a tax-sheltered investment. Here's what I mean:
If you want to sell your personal residence and you own either a C or an S corporation, selling your home to the corporation gives you the following tax benefits:
You can pull money out of your corporation TAX FREE! - This is because the gain on the sale of a principle residence can be excluded if the gain is $250,000 or less ($500,000 for married couples filing jointly) as long as you meet certain requirements.
Your company can rent out the house and generate BIGGER tax deductions - Since you sold your personal residence to the business, it now has a stepped-up basis (higher value) and can generate larger depreciation deductions than if you rented out the house yourself. If your corporation is an S corporation, these deductions can be used to offset your other income.
We just used this strategy much to the delight of one of my clients. Here are the facts and circumstances of this particular case:
My clients, Eric and his wife (not their real names and situation used by permission), are the 100% shareholders of a small and very successful printing company. The printing company is a Subchapter S corporation. Eric and his wife are expecting their fourth child in less than six months. They have both decided that they will need a bigger home. Instead of putting their current home up for sale, Eric and his wife have decided to keep it for investment purposes.
However, instead of keeping the home personally, they have sold it to the their corporation for its fair market value of $285,000. Since the cost of the home plus improvements is $175,000, Eric and his wife have a gain on the sale of their residence of approximately $110,000.
Since married couples filing jointly can exclude up to $500,000 of gain on the sale of a principle residence (subject to certain restrictions), Eric and his wife will NOT pay any federal tax whatsoever on the transaction.
In addition, the corporation now has an investment worth $285,000 that it will depreciate as a rental property. If, at the end of the year, the expenses are greater than the rental income, the owners of the S corporation (Eric and his wife) will have a rental loss that they can use to offset their other income.
Can you see the beauty in using this tax strategy?
In addition, if your corporation generates adequate cash, you can structure your own financing. Of course, everything has to be documented and executed as if you were selling it to a stranger. In other words, you can't sell your $200,000 home for $700,000 (unless that's the market value).
This strategy works even better when you have a C corporation. You can avoid the double taxation trap completely. Also, you can even use this tactic when you don't completely own your corporation. However, you'll have to consider the risks of losing control of the home to a fellow shareholder.
Nevertheless, if you're looking for a way to pull out money from your small business corporation TAX FREE, consider using this strategy. As always, be sure to consult with your professional tax advisor before considering this or any other tax or investment strategy
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