— Updated 11.07.2025 —
351 Transfer Introduction
A Section 351 transfer is a provision in the U.S. tax code that allows individuals or entities to transfer property to a corporation without recognizing gain or loss at the time of transfer, as long as certain requirements are met. This powerful rule helps business owners incorporate or restructure their companies without triggering immediate tax consequences.
Importantly, Section 351 applies to both C corporations and S corporations. However, while the same rule allows tax-free transfers to either type, additional S-corporation considerations (such as built-in gains or passive income restrictions) may still apply.
At its core, a properly structured 351 transfer lets entrepreneurs contribute assets (such as real estate, equipment, or intellectual property) in exchange for stock, while deferring capital gains taxes until a later, taxable event (like selling the stock).
What Are The Requirements For a 351 Transfer?
-
Transfer of Property:
One or more persons must transfer property (tangible or intangible) to a corporation.-
Note: “Property” does not include services. Stock issued for services rendered does not qualify under Section 351.
-
-
Exchange Solely for Stock:
The property must be transferred solely in exchange for stock in the corporation.-
If the transferor receives other property or cash (called “boot”) in addition to stock, the transferor must recognize gain to the extent of the boot’s fair market value.
-
If the corporation assumes liabilities and those liabilities exceed the transferor’s basis in the assets, that excess may also trigger gain recognition.
-
-
Control Requirement (the 80/80 Rule):
Immediately after the exchange, the transferor(s) must collectively own at least:-
80% of the total voting power of all classes of stock entitled to vote, and
-
80% of the total number of shares of all other classes of stock.
-
“Immediately after” can include near-simultaneous transfers that are part of one integrated plan.
-
-
Legitimate Business Purpose:
While Section 351 itself does not explicitly require a “business purpose,” the IRS can disallow non-recognition if the transaction lacks substance or functions as a disguised sale. Maintaining clear documentation of a legitimate business motive, such as incorporating for growth, raising capital, or limiting liability, is recommended.
If any of these conditions are not satisfied, the transfer will be taxable, and any gain or loss must be recognized immediately.
Give Me an Example of a 351 Transfer
Sally owns a sole-proprietor tech business, Innovate Solutions, with software assets valued at $500,000.
She decides to form a new corporation, Innovate Solutions Inc., and transfers all her intellectual property and software portfolio to the new corporation in exchange for 100 % of the stock.
Because Sally contributes property, receives only stock, and controls 100 % of the corporation immediately after the transfer, the exchange qualifies for tax-deferred treatment under Section 351.
- Sally does not recognize any gain or loss at the time of transfer.
- Her basis in the stock equals her prior basis in the contributed assets, and her holding period carries over.
- She will only recognize gain later if she sells her stock or the corporation sells the assets and distributes the proceeds.
What Are The Advantages of 351 Transfers?
Tax Deferral!
The primary benefit is tax deferral. This means that individuals or entities contributing property to a corporation do not have to immediately pay capital gains tax on appreciated assets.
- For example, if a business owner transfers real estate or other valuable property into a corporation, they will not have to pay taxes on any gain in the property’s value at the time of transfer. This can be a significant advantage for those looking to grow their business while minimizing upfront tax liabilities.
Flexibility in Contributions
A 351 transfer allows a wide range of property types to be contributed. This includes tangible assets like real estate and equipment, as well as intangible assets such as intellectual property, goodwill, or customer lists. By allowing a variety of assets to qualify for the transfer, business owners can consolidate their holdings into a corporation more easily.
Improved Capital Structure
Forming a corporation through a 351 transfer can result in a more robust capital structure for the business. By contributing property in exchange for stock, business owners create a corporation with tangible assets on its balance sheet. This can make the corporation more attractive to investors, lenders, and other stakeholders.
Corporate Growth Potential
By transferring assets into a corporation through a 351 transfer, owners can set the stage for potential future growth. A corporation can issue additional shares, bring in new investors, and expand operations more effectively than many other business structures. The tax deferral provided by Section 351 allows for these moves to be made without immediately incurring a heavy tax burden.
Preservation of Ownership Control
A key feature of the 351 transfer is that the individuals making the contributions must maintain at least 80% control of the corporation’s stock immediately after the transfer. This allows business owners to maintain control over their company while benefiting from the advantages of incorporating and deferring taxes.
What Are The Disadvantages of 351 Transfers?
Strict Compliance Requirements
The 351 transfer rules are highly specific, and failure to meet these requirements can result in the loss of the tax benefits.
- For example, if the contributors fail to own at least 80% of the corporation’s stock immediately after the transfer, they could be subject to immediate capital gains taxation. Additionally, non-qualifying transfers or missteps in structuring the transfer can lead to unexpected tax consequences.
Loss of Asset Control
When property is transferred to a corporation in exchange for stock, the assets become the property of the corporation, not the individual contributors. This means that the transferors no longer have direct control over the assets they contributed. Although they still own stock in the corporation, they cannot reclaim the specific assets unless they sell their shares, or the corporation distributes the assets back in a liquidation event.
Potential for Double Taxation
One of the disadvantages of contributing assets to a corporation through a 351 transfer is the potential for double taxation. If the corporation later sells the assets, the corporation will pay tax on any gain realized. If the corporation then distributes the profits to shareholders in the form of dividends, the shareholders will also pay taxes on those dividends. This contrasts with other business structures, such as partnerships, where income is only taxed once.
Stock Considerations
In a 351 transfer, the individuals contributing property receive stock in exchange. However, the stock received may not immediately be liquid or easily marketable. If the corporation is privately held, the stock might not have a readily accessible market value. Therefore, while the 351 transfer allows tax deferral, it may also result in a situation where individuals hold stock that is not easily convertible into cash.
Complexity and Administrative Burden
Structuring a 351 transfer involves significant legal and tax considerations. Business owners often need to consult with tax advisors, lawyers, and accountants to ensure that the transfer is properly executed. This can be time-consuming and costly, particularly for smaller businesses. Additionally, the corporation must adhere to ongoing compliance requirements, such as corporate governance rules and additional tax filings.
Section 351 Transfer Checklist
To qualify successfully and preserve deferral:
- Confirm that only property (not services) is contributed.
- Document the business purpose of the transfer.
- Ensure contributors own at least 80 % control immediately after.
- Avoid or carefully plan for boot (cash or other property).
- Track liabilities assumed by the corporation and compare to basis.
- Record carryover basis and holding periods.
- Maintain corporate documentation and file proper election statements where applicable.
- Consult qualified tax and legal professionals before finalizing the transaction.
Conclusion
A 351 transfer offers substantial tax advantages, making it an attractive option for business owners looking to incorporate or contribute assets to a corporation. By allowing the deferral of capital gains taxes and offering flexibility in the types of assets that can be contributed, the 351 transfer can facilitate corporate growth and improved capital structures.
However, the process requires strict adherence to IRS rules and comes with potential disadvantages, such as the risk of double taxation and loss of direct asset control. Business owners considering a 351 transfer should weigh these pros and cons carefully and consult with professionals to ensure a smooth transaction.
You can view our webpage on 351 Transfers HERE.
Let’s Talk!
If you have questions regarding your 351 Transfer, you can call us at 781-235-4426.
Or schedule a 15-Minute Discovery Call with one of our Advisors by clicking HERE .
Disclosures:
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.
Past performance is not indicative of future results.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.
Advisory Services are offered through Asset Strategy Advisors, LLC (ASA), an-SEC Registered Investment Advisor. Securities offered through registered representatives of Concorde Investment Services, LLC (CIS), member of FINRA/SIPC. Insurance Services offered through Asset Strategy Financial Group, Inc. (ASFG). ASA, CIS, and ASFG are independent of each other.
Asset Strategy does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances. There is no guarantee investment plans will meet its objectives.
There is no guarantee investment plans will meet its objectives.
#CAS00051462
