How to Transfer Real Estate Out of an S Corp: Distribution vs. Sale

To transfer real estate out of an S corp, the corporation either distributes the property to a shareholder or sells it to the shareholder at fair market value, and in both cases the IRS treats the corporation as having sold the property at fair market value on that date. The gain passes through to shareholders on their personal returns, and the transfer itself requires a corporate resolution, an independent appraisal, a new deed, and coordinated reporting across several IRS forms. Depreciation recapture, built-in gains tax, and related-party rules can each add a layer of cost, so the choice between distribution and sale, and the timing, matter.

Distribution or Sale

You have two mechanics available. In a distribution, the corporation conveys the property to the shareholder without receiving payment, either while the business keeps operating (a non-liquidating distribution) or as part of winding it down (a liquidating distribution). In a sale, the shareholder buys the property from the corporation at fair market value.¹

Both trigger taxable consequences, and they differ in how the gain is characterized and how the shareholder’s stock basis is adjusted. The right choice usually turns on the shareholder’s stock basis, whether the property has appreciated or declined, and whether the corporation was ever a C corporation.

The Tax Hit on a Distribution

Deemed Sale at Fair Market Value

When an S corporation distributes appreciated property, the tax code treats the corporation as if it had sold the property at fair market value.² If the adjusted basis is $200,000 and the fair market value is $500,000, the corporation recognizes $300,000 of gain. That gain passes through to shareholders in proportion to ownership and lands on their personal returns.

No Loss Deduction on Underwater Property

The same statute that forces gain recognition bars loss recognition on non-liquidating distributions of property worth less than adjusted basis.² Distribute a building that has dropped below basis and the loss is locked in with no deduction. Distribution is a poor choice for property that has lost value.

Depreciation Recapture

For a building that has been depreciated, the portion of the deemed-sale gain attributable to prior depreciation deductions is unrecaptured Section 1250 gain, taxed at a maximum rate of 25% rather than at the lower long-term capital gains rates that apply to the rest of the appreciation.³ For a long-held commercial building, this piece can be large.

Shareholder Basis Adjustments

Two adjustments happen at the shareholder level, in sequence. The pass-through gain from the deemed sale first increases the shareholder’s stock basis. Then the distribution reduces stock basis by the property’s fair market value.¹ If the fair market value exceeds the shareholder’s stock basis after the pass-through increase, the excess is capital gain on the personal return.

The shareholder’s basis in the property after receiving it equals its fair market value on the distribution date. When the shareholder later sells it, only appreciation above that figure is taxable.

Extra Layers if the S Corp Used to Be a C Corp

Built-In Gains Tax

If the S corporation was previously a C corporation and disposes of property that appreciated during the C corporation years, the built-in gains (BIG) tax applies when the disposition occurs within five years of the effective date of the S election.¹ The rate is the 21% corporate rate, applied to the gain that existed at the time of conversion. Stacked on top of pass-through gain and 25% depreciation recapture, the combined bite can be heavy enough to make waiting out the five-year window worthwhile.

Distribution Ordering When E&P Exists

Former C corporations may still carry accumulated earnings and profits. Distributions in that case follow a set order. The distribution first draws against the accumulated adjustments account (AAA), which represents income already taxed under S corporation rules. Once AAA is used up, the next slice comes from accumulated earnings and profits and is taxed as a dividend. Anything beyond that reduces stock basis, and anything beyond basis is capital gain.⁴ If the corporation has always been an S corporation, this ordering does not apply; distributions simply reduce stock basis, with any excess taxed as capital gain.

Related-Party Rules if You Sell Instead

Selling the property to the shareholder sidesteps the distribution mechanics but brings in related-party rules. If the shareholder owns more than 50% of the stock and the property is depreciable in the shareholder’s hands (most commercial real estate is), any gain the corporation recognizes on the sale is recharacterized as ordinary income rather than capital gain under Section 1239.⁵ Ordinary rates run higher than long-term capital gains rates, so this can raise the tax cost of a sale above what a first look would suggest.

Losses are restricted too. A sale to a more-than-50% shareholder at a price below adjusted basis produces a disallowed loss for the corporation.⁶ The shareholder may be able to use that disallowed loss against gain on a later sale to an unrelated party, but the corporation gets no current deduction.

Watch the Mortgage

If the property has a mortgage, transferring it can trigger the loan’s due-on-sale clause, which lets the lender demand full repayment when ownership changes. Federal law protects certain transfers from that clause, including transfers to a spouse, into a living trust, and upon a borrower’s death. A transfer from a corporation to a shareholder is not on that protected list.⁷

Talk to the lender before recording anything. Some will consent to the transfer or let the shareholder assume the loan. Get that agreement in writing before the deed is filed.

Title Insurance Does Not Follow the Property

Standard title insurance covers the named insured, which is the corporation. When title moves to the shareholder, the shareholder is a different legal entity, and the existing policy generally terminates. Plan on the shareholder buying a new owner’s policy. Review the current policy language before the transfer to see whether any coverage carries over.

Documents to Prepare

Corporate Resolution

Start with a written resolution from the board, or from the shareholders if there is no board. The resolution should authorize the specific transfer, identify the shareholder receiving the property, state whether it is a distribution or a sale, and name the officer authorized to sign the deed. It stays in the corporation’s permanent records as evidence the transfer was properly authorized.

Independent Appraisal

Get a licensed appraiser to establish fair market value as of the transfer date. Every downstream number depends on it: the corporation’s gain, the shareholder’s basis adjustments, and any BIG tax liability. An outdated or informal valuation is where these transfers most often go wrong, because the error flows through every calculation.

The Deed

A new deed conveys legal title from the corporation to the shareholder. It must name the corporation as grantor, the shareholder as grantee, and include the property’s full legal description from the existing deed. A warranty deed provides the most protection; a quitclaim deed transfers whatever interest the corporation holds with no guarantees. The officer authorized in the resolution signs before a notary.

IRS Forms to File

Form 4797. The corporation reports the deemed-sale gain here, including any depreciation recapture.⁸
Schedule K-1 (Form 1120-S). Each shareholder’s K-1 reflects their share of the gain. The distribution amount goes in Box 16, code D, and the shareholder uses it to reduce stock basis. Any distribution above stock basis is reported on Form 8949 and Schedule D.⁹
Form 1099-DIV. Only required when the distribution comes from accumulated earnings and profits carried over from prior C corporation years. If the corporation has always been an S corporation, no 1099-DIV is needed.¹⁰
Form 5452. Filed by the corporation to report nondividend distributions.¹⁰

Recording and Transfer Taxes

After the deed is signed and notarized, file it with the local recording office (county recorder or register of deeds, depending on jurisdiction). Recording puts the transfer in the public record and protects the shareholder’s ownership against later claims.

Recording fees vary by jurisdiction and are usually modest. Most states also impose a real estate transfer tax based on property value, with rates that generally run from under 0.1% up to about 1%; some high-cost areas add surcharges, and a few states impose no transfer tax at all. Whether a transfer between a corporation and its shareholder qualifies for an exemption depends on local law: some jurisdictions exempt these transfers, others treat them like arm’s-length sales. Confirm the number and the exemption question with the recording office or a local real estate attorney before the transfer date.

1
Internal Revenue Service. Property Distribution – IRS Transaction Unit
2
Office of the Law Revision Counsel. 26 US Code 311 – Taxability of Corporation on Distribution
3
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
4
Internal Revenue Service. Distributions with Accumulated Earnings and Profits – IRS Practice Unit
5
Office of the Law Revision Counsel. 26 US Code 1239 – Gain From Sale of Depreciable Property Between Certain Related Taxpayers
6
eCFR. 26 CFR 1.267(a)-1 – Deductions Disallowed
7
Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
8
Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
9
Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S)
10
Internal Revenue Service. Instructions for Form 1099-DIV