Q: I am from the island of Maui in the state of Hawaii. I am the president of my family’s S-corp. The corporation has a property that has a house on it, but it is not considered livable.
A home was built by a tenant on the land. The tenant had a 50-year lease. Now the lease ended, and the home belongs to our corporation. When the lease was up and the property was turned over to us, we didn’t receive any tax bills from Maui County until last month. We received a final notice of unpaid taxes and explaining terms about delinquent payments and the force of foreclosure if the said amount wasn’t paid in full by two weeks.
I called the department of tax and had a lengthy discussion with them. The director of tax had me write a letter regarding our situation and agreed to write up an installment plan for five months. That is all fine, and I understand that we are at fault for not following up on taxes regardless that we didn’t receive any notices until now.
Here’s my issue: The S-corp is made up of family members and has total of 30-plus shareholders. The corporation is “land rich” but has no income, nor does it have any moneys to pay land taxes. All taxes are being paid by shareholders; at least, the ones who can pay or want to pay.
At least half the shareholders live very basic lives and have minimal household income and collect subsistence from the state. The rest of the shareholders just won’t pay anything because they claim that they don’t have an obligation to pay. If we don’t get these back taxes paid within the deadline, the county of Maui will proceed with foreclosure.
I am one person of two who could actually pay these back taxes and stop the foreclosure, but our issue is the ongoing obligation to pay the tax bills. If we are going to be stuck paying it, I would want to have ownership of the property. I just don’t know how to go about getting everyone to sign off on it. I really would hate to lose the property because of not paying the taxes. I’ll take any advice you can share. Thank you.
A: Thanks for your question. Your question falls into that group of questions that deals with people who own real estate together and don’t get along. In your situation, you have a large group of people who own a corporation that then owns the land.
(You mentioned that the corporation is an “S” corporation vs. a “C” corporation. With an S-corporation, the shareholders see the tax benefits and losses on their personal income tax returns. With a C-corporation, the shareholders receive dividends on distributions but can lose their investment and don’t see the benefits of profits or losses that are at the corporate level flow to their personal income tax returns.)
The issue is not how you hold title to the property but what governs the relationship between the owners of the home, the land, the building or whatever real estate is owned by those people or that company. You’ll need to see what the corporate charter or shareholder agreement has to say. As a corporation, some shareholders may have certain rights if they put more money into the corporation and dilute the ownership interest of other shareholders.
We don’t typically deal with corporate issues in this column, but as we have talked about when we have family members own property together, you need to figure out how to pay those taxes to keep the land and then figure out how you get repaid for the money you have put into the corporation. Either the money you put in is a loan to the corporation that will have to get repaid at some future date when the corporation has income or when the property is sold. Or, as we mentioned, your contributions to the corporation could increase your ownership in the corporation and reduce the ownership interest of others in the corporation.
You should talk to a corporate attorney to review your corporation documents and determine what your options might be, how you’d need to handle the infusion of cash to the corporation, and what actions the corporation must take to make sure the structure is solid and other owners can’t object to how the money was put in and how the money will get repaid.
But we agree with one thing: It would be unfortunate to lose an eight-acre parcel on Maui simply because no one wanted to pay the taxes.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.