Distributions of appreciated property are valued at fair market value. If property other than cash was distributed, attach a statement to provide the following information.
• The date the property was acquired.
• The date the property was distributed.
• The property's FMV on the date of distribution.
• The corporation's basis in the property.
Distributions
General rule. Unless the corporation
makes one of the elections described
below, property distributions (including
cash) are applied in the following order (to
reduce accounts of the S corporation that
are used to figure the tax effect of
distributions made by the corporation to its
shareholders).
1. Reduce the AAA determined
without regard to any net negative
adjustment for the tax year (but not below
zero). If distributions during the tax year
exceed the AAA at the close of the tax
year, determined without regard to any net
negative adjustment for the tax year, the
AAA is allocated pro rata to each
distribution made during the tax year. See
section 1368.
2. Reduce shareholders' PTEP
account for any section 1375(d) (as in
effect before 1983) distributions. A
distribution from the PTEP account is tax
free to the extent of a shareholder's basis
in his or her stock in the corporation.
3. Reduce AE&P. Generally, the S
corporation has AE&P only if it hasn't
distributed E&P accumulated in prior years
when the S corporation was a C
corporation (section 1361(a)(2)). See
section 312 for information on E&P. The
only adjustments that can be made to the
AE&P of an S corporation are:
a. Reductions for dividend
distributions;
b. Adjustments for redemptions,
liquidations, reorganizations, etc.; and
c. Reductions for investment credit
recapture tax for which the corporation is
liable.
See section 1371(c) and (d)(3).
4. Reduce the other adjustments
account (OAA).
5. Reduce any remaining
shareholders' equity accounts.
Elections relating to source of distributions.
The corporation may modify the
above ordering rules by making one or
more of the following elections.
Election to distribute AE&P first. If
the corporation has AE&P and wants to
distribute from this account before making
distributions from the AAA, it may elect to
do so with the consent of all its affected
shareholders (section 1368(e)(3)(B)). This
election is irrevocable and applies only for
the tax year for which it is made. For
details on making the election, see
Statement regarding elections. To make any of the above elections, the corporation must attach a statement to a timely filed original or amended Form 1120-S for the tax year for which the election is made. In the statement, the corporation must identify the election it is making and must state that each shareholder consents to the election. The statement of election to make a deemed dividend must include the amount of the deemed dividend distributed to each shareholder. For more details on the election, see Regulations section 1.1368-1(f)(5).
all this info can be found in 1120-S instructions
https://www.irs.gov/pub/irs-pdf/i1120s.pdf
from what I've seen some taxpayers handle real estate loss pass-throughs incorrectly when an S-Corp owns the property. Mortgages do not provide tax basis to take losses. so i've seen where shareholders take losses in excess of their tax basis. if this is your situation consult a tax pro.
