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Transferring Assets Into Your Corporation

Updated: Jan 23, 2020

Here's a written response to one of our most asked questions clients have after they incorporate their business.

"Can I transfer my home or other properties into my corporation?"

The answer is yes, and here's why.

If you are forming a new corporation or just interested in transferring assets into your existing corporation keep in mind that any transfer of property in an exchange is generally taxable in the same manner as a sale for cash. The gain or loss in the exchange will be measured by the fair market value of the property received and the basis of the property transferred. One of the exceptions to this general rule is where a person transfers property to a corporation solely in exchange for its stock if immediately after the exchange he is in "control" of the corporation. The good thing is that it does not have to be a newly formed corporation, if the transferor or transferors receive stock and are immediately after the exchange in "control" of the corporation.

Under Internal Revenue Code §351, no gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for the stock in the corporation and immediately after the exchange such person or persons are in control of the corporation. The basic requirement for this tax-free exchange is that the transferor or transferors must be in control immediately after the exchange. Control, for this purpose, means the transferor or transferors must have ownership of stock possessing at least 80 percent of the total stock of the corporation. The gain or loss is not recognized when in exchange for the transferred property, the transferor receives the corporation's stock or securities.

A transferor could transfer appreciated property into a corporation without recognizing a gain. For purposes of Internal Revenue Code §351, when a transferor receives securities, such securities will be treated as "boot" in all cases. Boot is other property or money the transferor receives in addition to the stock.

Permitting a nontaxable transfer to a controlled corporation will postpone the recognition of gain or loss until the stock received in the transfer is ultimately disposed of by the transferor. This is accomplished by attributing to the stock the same basis as that of the property originally transferred in exchange. More importantly, the property transferred will retain its basis in the hands of the corporation.

The first step in the transfer process is to form the corporation and the offer by the transferor of the property to the corporation. The courts have held and the Internal Revenue Service has ruled that money qualifies as property in addition to goodwill, patents, and other intangible assets constitute property for this purpose, except services. The second step would be that the corporation's shareholders and the board of directors must accept the offer, and the board of directors must authorize the issuance of the stock upon delivery of the appropriate instruments of conveyance. The final step is the execution and delivery of the instruments of conveyance and property. The importance of formal instruments of transfer, even in the case of a small corporation, cannot be overemphasized. Such instruments are not only a prerequisite to completing the transaction, but can record effectively the price and terms of the transaction.

This is just one of many valuable things you can do with a corporation to help your business and your family. Need to incorporate? Consider SignalHarmony.

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