Agent LLCs taxed as S-Corp's - Opinions?

Question

Hi All,

As one step towards my real estate investing goals, I have recently acquired my RE license in PA. I am focusing on buyer representation for income-producing properties (I am blessed to already have an investor client looking for 100+ unit apartments) and assisting investors with listing rehabs (I has a design/construction background and can add value other than simply marketing the finished product). I like to be strategic in setting up the business and tax structures of new ventures and was already familiar with the benefits of being taxed as an S-Corp when high enough earnings are expected.

In asking around, most brokers and agents seem to think this is a terrible idea and probably illegal. I have also spoken with two CPAs who don't think it is an issue so long as actual income is high enough about the 'reasonable salary' such that the tax savings are equal to or greater than the $2000ish annual costs of administrative maintenance (LLC expenses, payroll company, added filing expenses, etc.)

Is anyone actually doing this who can shed a little light? I am not one to try to do anything sketchy and don't mind paying taxes, but if I can do this in my consulting business, I don't see why I couldn't in real estate sales.

Peter Dunne · Answer

Thanks @Art G. The video is helpful.

My purposes are purely about maximizing after-tax revenue as a licensed real estate agent. Liability is generally covered through errors and omissions insurance. I would not be created an LLC so much to manage risk, but to be able to be taxed as an S-Corp and not as a sole proprietor, as most agents are. LLCs are able to elect from several taxing options. I am not looking to provide additional professional services like legal or tax advice (In fact, I am prohibited from doing so unless I am duly licensed).

Thanks again.

Dawn Brenengen · Answer

@Peter Dunne I have an LLC and file as a S corp.  I just started this last year, but I did it on the advice of my CPA.  There's definitely nothing shady about it....just using the tax code to your advantage.

Steven Hamilton II · Answer

The big issue is BROKER vs AGENT.  An agent typically makes their commissions themselves. And some have had their salaries increased substantially by auditors.Brokers tend to be much more likely to have a lower salary due to the work of others. Keep in mind there have been different rulings in different jurisdictions.

@Patrick Milia I'd be careful unless you have others Your wages are your commissions. If your employee is not generating revenue you are still providing personal services. This is the reason a C-corp is a terrible idea for a broker.

Patrick Milia · Answer

I too am an agent in PA who was looking for a way to legally save on taxes, and reduce some of my liability when I hired an employee to assist me. A few years ago, I created an LLC and then applied to the PA state real estate commission for what's called a "qualified association".  The LLC gave me the liability protection I was looking for, but there wasn't any tax break in doing it. It wasn't until this year when I switched accountants, and my new accountant recommended I create an S-Corp, then apply to the state real estate commission to have the S-Corp placed into a new "qualified association."  I am currently in the process of doing that. The S-Corp offers tax breaks (I was told the annual commissions have to be over $150k for it to make sense) as long as you are paying yourself a reasonable salary ($40k-$50k). I'd be happy to recommend my accountant if you'd like.

Art G. · Answer

Here is a great video by an attorney long time real estate investor that explains LLC vs S-Corp.

As to your other question about "setting up the business and tax structures..." I am not sure if setting up a business does require a license but it sure sounds like it does require you to be a certified financial planner or something licensed. As far as giving tax advise... YES you must have a CPA license or be a tax attorney.  When You answer questions from people, say, have you thought about doing it like this.....? Just an idea, you should ask.... (professional). That way you are covered.

Here is the bottom line, you are putting yourself out as a professional to people with a lot of money on the line. If they fail, which likely will have nothing to do with you, but if they do, they will want to sue someone to get the money back. And since you are a professional they will be coming after you.

Ask yourself this, can I get insurance to cover the practice of giving advice on these topics? Call Insurance companies and find out if they would cover you, and if they require a professional license before they do.

I do not see why you are sticking your neck out there and creating all this exposure, when you receive no benefit from it. But if you can currently get insured for this, and you get paid extra for doing the extra work, then go for it! Just make sure your long term is protected.