Should I do an LLC, S Corp or leave it under my name?

Question

I purchased my 4plex several months ago and plan to buy more in the beginning of the year, is it wise to leave it under my name or should I create an LLC/S Corp ? I am looking for the best way to pay less taxes and beneficial for when I am purchasing more buy n holds.

Bob Norton · Answer

@Gerardo Ali S-Corps are the preferred entity for rehabbing/flipping.  If you are renting the property, then you should put it into an LLC.  That way you get to include the debt on the property as part of your basis and be able deduct the loses in the early years from interest and depreciation.  Rental property is not subject to SE tax, so putting it into an S-Corp to save SE taxes is not necessary.  In addition, as an S-Corp owner you are required to pay yourself a reasonable salary when you do make a profit so you will then be creating more tax, instead of saving it.  Also, as an S-Corp, you do not get to use debt as your basis, so any losses in the early years will be suspended until you begin earning profits, so you would not get to deduct any of the losses in the early years to offset any other income.  Finally, you will qualify for a bigger QBI deduction if you make a profit with an LLC, because you will not be paying yourself any wages which will increase your pass-through income and your potential QBI deduction.  Wages generally reduce QBI income and the related deduction.

JM Payne · Answer

LLCs are really pass-throughs, so they offer protection more than tax benefits.

S-Corps, on the other hand, offer tax benefits by qualifying some of the income as dividends as opposed to income, but you have to have enough to justify the expense of a separate corporate tax return and that's more relevant to flips than long term holds.

On the plus side, the QBI deduction in the recent tax bill will save you some coin.

You should have SOME type of corporate veil (move it to a corporation) to protect your personal assets as well as create barriers between the properties where necessary, but the specific solution to your situation is a bit too vague for anything other than generalizations without more clarifying information, and your best and most specific advice will come from a local and trusted tax advisor and/or lawyer.  I realize they cost money, but it's money well spent.

I hope that helps, sorry there is not a one-size-fits-all answer.

- JM