S-corp for properties: Hard to sell?

Question

Hi all

I had several properties in a LLC and in order to buy more my mortgage broker (very savvy guy) had me re-structure/re-characterize my LLC into an S-corp (essentially a LLC taxes as S corp).  That way that one entity could hold several properties and then I could then buy more in my own name (we can buy 10 in our own name through Fannie etc)

I was told by a real estate attorney that holding properties this way (in S corp) could be problematic when the time comes to sell them.  He mentioned it's not advantageous from a tax perspective, having to pay some type of entity level tax?  Anyone heard of this or had issues selling properties out of an S corp?

I don't plan on putting more properties in the corp; it was a one time thing to allow me to buy more.

Thanks for any input!

Eric

Columbus, OH

Wayne Brooks · Answer

You can either have an LLC taxed as an S corp, OR you can have an S corp, taxes would be the same, but not ownership.  The more relevant question is, are You individually on the mortgages, or guaranteeing them?  If so, changing the "ownership" is irrelevant.  The limitation is you being on the Mortgage for 10 properties, and I believe irrelevant to the name title is held in.  Sub S has no "entity level" income/profit taxation, it's a straight pass thru to you.

Eric Fete · Answer

I guess my main question would be is what happens when I sell the properties in the S-corp?  Is there any negative tax implications?  If so is there a way to avoid that perhaps by re-converting the corp to a LLC?

Thanks again!

Eric

Eric Fete · Answer

Thank you gentlemen!

Eric

Pierre Clark · Answer

If a property is  owned in the name of an LLC, that is not the same as a property being owned by an individual member of the LLC. The member of the LLC owns an interest in the LLCs shares, not an individual property owned by the LLC. You can designate specific income and expense items from the property owned in an LLC to an individual member, but that designation does not mean that the individual member "owns" an interest in that specific property. The problem with an "S" or "C" corporation owning a property is that when it comes time to sell, the selling of that property counts for income tax purposes against the corporation as a whole, there is no segmenting of the income and expenses of an asset as is allowed within an LLC structure. Even if an individual has a sole-member LLC that owns a property, the ownership would be vested in the LLC. not the individual. The income and expenses pass through to the individual who is the owner of the LLC, but not the ownership of the property itself, and no liabilities would pass through either unless the LLC owner signs a personal guarantee, which would somewhat defeat the purpose of putting the property in the LLC in the first place. So an individual could be the majority owner of the interests in 100 LLCs, each of which own one or more properties, and from a legal standpoint, he would not own any of those properties, but the member interest in the LLCs that own those properties. In case of a lawsuit, a suit could only be brought against the LLC, not the individual. I can show you a number of examples of this. I had a client who quit claimed a property on which she owed a debt to another individual so he could get a mortgage on that property. He put the property in an LLC and stopped paying the mortgage. She was able to get the property back in her name by proving an illegal conveyance and because the mortgage note was in the name of the LLC, which had been allowed to dissolve involuntarily, there was nothing the bank could do to encumber her property again, since she was not the legal mortgage holder, the LLC was.Similarly, states like Illinois allow the formation of series LLCs, which is a group of LLCs which all share the same name and are designated by Roman numeral, I, II, etc. Each of these series LLC is considered a separate LLC and there is no liability shared between them. Hope this helps.

Manolo D. · Answer

Hi Eric, I am not a tax expert, but a businessman, having more property under one LLC/Corp is a risky one. I am not sure about 10 properties, but what my attorney told me was if you hold one property per llc adds an additional layer of protection on the liability side of it. My structure is this create one Main LLC that will be shareholders of sub-LLCs. That way, if you are to sell, you just sell LLC1 or LLC2 or LLC8, a simple change in ownership is all it takes for the sale. I am not sure what you are trying to achieve, but it is almost the same, and an LLC can be taxed at entity level or pass through, it means that you can choose double taxation (taxed as regular corp) or not (taxed as S-Corp). The only difference between LLC and Corps, is with corps your dividend is dependent on how much % shares you own, and on LLC, you can have different sharing agreements. For the tax experts, please correct me if I am wrong, would also like additional input.

LLC/Corp Structure:

Main LLC

> LLC 1, LLC 2, LLC 3, ..., LLC10 etc.

Mike H. · Answer

As previously stated, you need to make sure you make that selection when setting up your S Corp.   But there should be no "additional" taxation when selling a property there.

One other thing. Its no longer just properties in your name. If you own them in an LLC, they count against you too. Which is probably why they're telling you to move them into an S Corp.

S-corp for properties: Hard to sell?

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