Intro to Corporate Taxes:

Tax Repercusions of Trading Property for Stock

It might seem like a great idea at first but there is a very strict rule involved at the center of trading properties for stock. Your client doesn’t want to be paying taxes on the stock they just bought or the property they just traded in. Many people feel that the exchange of property for stock is a surefire thing but at the same time your client has to realize that the main issue here is not the transfer of property but how Uncle Sam views it.

If your client is a stockholder and he/she exchanges their property for some stock in the company, the exchange will be taxed. Your client would have to include it in their taxable income. But if they own 80% or more of the stocks in the company and they have control over the company, the exchange that your client made for stocks was a non-taxable exchange.

The IRS can’t touch that money. But the main issue here is 80% control of the stocks. Without it the exchange cannot be non-taxable. It doesn’t matter to the IRS if the corporation is fully operational or not as long as the idea for the company exists and there are people working on building the corporation. However, if the property is worth less than 10% of the stocks and securities issued by the company to it’s stockholders then the property is disqualified and cannot be used in the exchange.