When S Corps and Real Estate Don’t Mix: What Every Investor Should Know
Did you know S Corporations make great vehicles for holding rental real estate?
Yeah, me neither.
In fact, it’s such a no-go situation, if I hear someone call it malpractice, I won’t argue.
What’s so bad?
Consider the purpose of an S Corp. Minimize self-employment taxes. And…that’s it. What does rental real estate typically not generate? Self-employment taxes. Why try to solve a problem you don’t have?
That SHOULD be sufficient, but to hit the point home:
What do S Corps usually require? Officer salary. Which comes with payroll taxes. Putting rental real estate in an S Corp takes income NOT otherwise subject to self-employment/payroll taxes and potentially subjects it TO self-employment/payroll taxes + payroll tax filing requirements.
S Corp rules are a mixup of partnership and C Corp rules. Sometimes partnership rules govern, particularly pass-through tax treatment. But a LOT of times C Corp rules govern resulting in a tax treatment you might not like. Want to move property out of your S Corp into a different tax structure? You just might get hit with taxable gain when you retitle. Yes, even without selling. You could probably avoid this in an alternative tax structure.
Want flexibility on splitting profits in a multi-owner situation? Thinking you’ll claim tax losses for expenses funded by a mortgage? Nope and nope. Not in a S Corp.
And the list goes on.
How DO we hold rental real estate? Several ways - direct ownership including JTWROS and TICs, partnerships, some type of trust possibly, and even C Corps if we’re talking foreign or non-profit investment. Your attorney and tax pro can best advise on what make sense for you.
Keep in mind there are COUNTLESS ways to make 💵 in real estate. Renting is only one. If you’re up to other activities such as developing, selling, flipping, etc., an S Corp in your structure could be a good thing.
The real moral of the story, as always:
If someone tells you your business or investment NEEDS a certain type of tax structure and they know NOTHING about what you’re doing, RUN.
