There are two types of appreciated properties: real property (real estate) and intangible property (stocks, bonds, and the like). To remove property from a corporation, ownership/title must change. Removal is generally by sale or by distribution to shareholders. The choice depends on specific circumstances, relating to the particular property; the state of the corporation’s business and finances; the nature (entities or individuals) and the number of shareholders; if the corporation intends to pay a dividend; and income tax considerations for both the corporation and its shareholders. No "one size fits all" decision is possible. Normally, the formal sale of any property, whether at a profit or a loss, is a taxable event, which affects the seller’s overall income tax liability.
Decide whether to sell the property or to distribute it to shareholders.
Sell the property in the normal way, by finding a willing buyer, making a viable deal, and transferring title to the buyer in exchange for payment.
Record the transaction in the corporation’s books by crediting both the asset account (for the corporation’s cost) and income (capital gain) while debiting cash for the sale proceeds. Because the property is appreciated, the capital gain on the sale – the difference between the sale price and the corporation’s purchase cost – belongs to the corporation. Normally, that causes a tax liability to the corporation.
Distribute the property to shareholders. Instead of selling the property and then splitting the proceeds among shareholders, ownership of the property is changed from the corporation to shareholders. The taxable event to shareholders depends on whether the distribution to shareholders is a return of capital or a dividend.
Record the distribution of the property by crediting the asset account (for the cost) and by debiting each shareholder’s account for his/her respective ownership share of the corporation’s cost of the distributed property.
S-Corporation profits and losses are reported on shareholders’ income tax returns. How much and what kind of income taxes are ultimately paid by shareholders, as a result of the overall transaction of removing any property from the corporation, depends on whether and/or when the property is sold or distributed. Deciding whether to sell or to distribute property, especially if it is appreciated, can be complex or sensitive (especially, if S-Corporation shareholders are family members). Note, however, that all S-Corporation income must be reported on shareholders' income tax returns, whether or not the income is actually distributed.