As the only shareholder of an S Corp, you might think that everything the business owns you also personally own. Not true. The relationship you have with your S Corp is not a marriage where mine is mine and yours is mine too.
We recently had a consult with an S Corp owner whose business owned a hotel building. On the advice of an inexperienced CPA he revoked his S corporation election. This triggered a distribution of business assets at fair market value. The basis in the hotel building was $400,000 and the fair market value was $2,000,000. This sparked a $320,000 capital gain tax event reported on his K-1. Capital gains is a success tax, right? But when you don’t actually get the cash from the transaction, this tax could be impossible to pay. Keep appreciating assets out of an S corporation people!
Sole proprietors and garden-variety LLCs enjoy a bit more flexibility under certain circumstances.
If the asset is sitting in the S Corp upon your death, the S corporation’s stock value might get a step-up in basis through an appraisal. However it might prove harder to demonstrate than the increased value of one particular asset. Look at it another way. S Corps don’t die, and therefore assets within the business don’t get a step-up in basis upon a shareholder’s death.
We’ll acquiesce. This trapped asset problem is super rare yet so many owners love to have personal stuff owned by the S Corp.
Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition