Is it better to own investment RE via a corp, or as a person?

Discussion in 'Financial Planning' started by Igor Chudov, Apr 24, 2011.

  1. Igor Chudov

    Igor Chudov Guest

    I won a house at a real estate auction. I can buy it either with
    personal money, or with money in my corporation's account. The intent
    is to either rent it out or resell, I have not decided.

    My question is, from a tax standpoint, is it better to own it through
    a S corp, or personally?

    i
     
    Igor Chudov, Apr 24, 2011
    #1
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  2. On Apr 23, 10:24 pm, Igor Chudov <> wrote:
    > I won a house at a real estate auction. I can buy it either with
    > personal money, or with money in my corporation's account. The intent
    > is to either rent it out or resell, I have not decided.
    >
    > My question is, from a tax standpoint, is it better to own it through
    > a S corp, or personally?
    >
    > i


    To reduce liability, you should own it in an LLC or a corporation. LLC
    is easier to manage for compliance, and a corporation may offer more
    tax advantages with higher cash flow; might depend on whether your
    income is considered active or passive. I have several properties all
    owned under LLCs. Good luck.
     
    Bernarr Pardo, Apr 25, 2011
    #2
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  3. Igor Chudov

    Igor Chudov Guest

    On 2011-04-24, Bernarr Pardo <> wrote:
    > On Apr 23, 10:24?pm, Igor Chudov <> wrote:
    >> I won a house at a real estate auction. I can buy it either with
    >> personal money, or with money in my corporation's account. The intent
    >> is to either rent it out or resell, I have not decided.
    >>
    >> My question is, from a tax standpoint, is it better to own it through
    >> a S corp, or personally?

    >
    > To reduce liability, you should own it in an LLC or a corporation. LLC
    > is easier to manage for compliance, and a corporation may offer more
    > tax advantages with higher cash flow; might depend on whether your
    > income is considered active or passive. I have several properties all
    > owned under LLCs. Good luck.
    >



    Bernarr, I already have an S corp. It is called Algebra, Inc,
    www.algebra.com. I would own the house through that one if I decide to
    go corporate route. Would it be harder to sell the house, though?

    i
     
    Igor Chudov, Apr 25, 2011
    #3
  4. "Igor Chudov" <> wrote in message
    news:...
    >I won a house at a real estate auction. I can buy it either with
    > personal money, or with money in my corporation's account. The intent
    > is to either rent it out or resell, I have not decided.
    >
    > My question is, from a tax standpoint, is it better to own it through
    > a S corp, or personally?


    I NEVER advise a client to own an appreciating asset, typically real estate,
    inside a corporation of ANY kind, not even an S Corp.

    C corporations do not get the benefit of special long term capital gain tax
    rates. Renting the house will reduce your basis because of depreciation.
    Selling the house will (at least we HOPE) result in a gain, if for no other
    reason than simply because of the depreciation recapture rules. So if a C
    Corp sells a house it will pay tax at regular C Corp tax rates.

    Why not an S Corp, it is a pass through and any gain will pass through to
    the stockholders and THEY get long term capital gain rates right?
    Technically yes, today, with the current rules we have, and assuming the IRS
    never challenges your S election. Unfortunately, I've seen more a few S
    Corps get their S elections revoked because they failed to play by the
    rules - usually this is accidental, but sometimes its deliberate. Either
    way, if the IRS rejects your S election the house is stuck in a C corp. and
    generally higher tax rates apply.

    I am not a lawyer so I am not giving you legal advice - you need to also be
    aware that should the corp. (c or s, doesn't matter) gets sued then all the
    assets of the corp. are at risk. Hence, it may not be advisable to put all
    your eggs in one basket. This is why the big players set up multiple
    companies to conduct business - multiple companies create multiple layers of
    shielding to help protect assets in the event of a suit. And it matters not
    a whit whether its the S corp. business or the rental that results in the
    suit, all the corp. assets would still be at risk.

    Rentals are considered passive activities and no self employment tax is due
    on any of the annual profit BUT ONLY if it is held personally or in a
    pass-through entity, like an LLC or S Corp. If you do go the S corp. route
    you must report the rental on a separatea form as an attachment to the
    1120S - similar to using a Schedule E as part of your 1040. If you set up a
    single member LLC and owned the house either alone or with your spouse, you
    will still be a disregarded entity but you'd report it on Schedule E as part
    of your personal return.

    Holding the rental in an S Corp means that its still a passive activity but
    that does NOT necessarily relieve you of the requirement to tax payroll as
    an employee, so you're still on the hook for payroll taxes -which can be
    avoided by using an LLC or Schedule E.

    Lastly, REMOVING a rental from an S Corp - say you want to live there
    personally or simply want to shut down the corporation for whatever reason -
    means you have treat the distribution AS IF it was sold to you at full fair
    market value. This is part of the Deemed Sales Rules. This generates
    phantom income at the corp. level which you have to pay tax on even though
    there is no actual cash with which to pay the tax.

    You really should see a local tax pro with experience in rental properties
    before you make a decision that will cost you more to unwind than it would
    cost to get help and do it right from the beginning.

    Good luck,
    Gene E. Utterback, EA, RFC, ABA
     
    Gene E. Utterback, EA, RFC, ABA, Apr 26, 2011
    #4
  5. Igor Chudov

    Pico Rico Guest

    "Gene E. Utterback, EA, RFC, ABA" <> wrote in message
    news:ip6qka$673$...
    > "Igor Chudov" <> wrote in message
    > news:...
    >
    > Rentals are considered passive activities and no self employment tax is
    > due on any of the annual profit BUT ONLY if it is held personally or in a
    > pass-through entity, like an LLC or S Corp. If you do go the S corp.
    > route you must report the rental on a separatea form as an attachment to
    > the 1120S - similar to using a Schedule E as part of your 1040. If you
    > set up a single member LLC and owned the house either alone or with your
    > spouse, you will still be a disregarded entity but you'd report it on
    > Schedule E as part of your personal return.


    If you own real estate in a C Corp, is self employemnt tax due?

    >
    > Holding the rental in an S Corp means that its still a passive activity
    > but that does NOT necessarily relieve you of the requirement to tax
    > payroll as an employee, so you're still on the hook for payroll
    > taxes -which can be avoided by using an LLC or Schedule E.


    isn't this contrary to the above paragraph?
     
    Pico Rico, Apr 26, 2011
    #5
  6. Igor Chudov

    Igor Chudov Guest

    Gene, I hear you loud and clear. I will own it personally. Thank you
    VER much for a very well thought out response.

    i
     
    Igor Chudov, Apr 27, 2011
    #6
  7. "Pico Rico" <> wrote in message
    news:ip738p$qj6$...
    >
    > "Gene E. Utterback, EA, RFC, ABA" <> wrote in message
    > news:ip6qka$673$...
    >> "Igor Chudov" <> wrote in message
    >> news:...
    >>

    SNIPPED SOME

    > If you own real estate in a C Corp, is self employemnt tax due?


    There is NO self employment for C Corporations. Instead you take a salary,
    subject to FICA taxes.

    >> Holding the rental in an S Corp means that its still a passive activity
    >> but that does NOT necessarily relieve you of the requirement to tax
    >> payroll as an employee, so you're still on the hook for payroll
    >> taxes -which can be avoided by using an LLC or Schedule E.

    >
    > isn't this contrary to the above paragraph?


    Not at all.

    Corporations, both S & C, are required to pay their employees - INCLUDING
    the owners who perform services for the corp, including the management of
    rentals - a SALARY. This salary is subject to FICA taxes. So while the
    rental activity itself would be passive, by holding it in a corp of any kind
    essentially converts at least some of the income to ordinary income, subject
    to a tax that would NOT apply if you held the rental differently.

    Alternatively, LLC members and Schedule E operators are NOT ALLOWED to take
    a salary. Instead, LLC members may need to take Guaranteed Payments which
    are subject to Self Employment tax. HOWEVER, if the ONLY item in the LLC is
    a rental then it would stay a passive activity and SE tax would not apply.
    Schedule E operators also pay no SE tax.

    Gene E. Utterback, EA, RFC, ABA
     
    Gene E. Utterback, EA, RFC, ABA, Apr 28, 2011
    #7
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