"S" vs llc

1 Reply

I posted this on another BiggerPockets Forum and did not receive any replies...so I will try here:

Starting out with a buy and hold real estate strategy...mostly single family or small 2-4 unit multi...currently my (untested) model is looking for $200 a door monthly margin.

I was all set to establish 2 llc(s) one for holding the property and one for the property management. It seems as though if not now soon the tax regulations for llc will require payment of self-employment tax.  My wife and I are both employed elsewhere so we are not intending to pay ourselves from real estate investment, only looking to build a profitable portfolio.

I think I can avoid self-employment tax by setting up an "S" corporation for the entity that "holds" property. There are just two of us and we can meet all criteria for "S".

Although I feel like an "S" Corp is the best way nearly no one speaks about an "S", most all discussions support an llc -- what am I missing?

I understand the "consult a tax adviser" stance and that is good advice which I will take; however, at this point I am trying to understand why the overwhelming majority of free advice is llc...other than you get what you pay for

Thank you for your thoughts and perspective -- b

Hi @Bernie Huckestein  

There is a lot of debate here on BP about whether to even utilize an entity to hold property. Personally, I think it's a good idea, but many people would say you're better off just holding in your own name and getting a larger umbrella insurance policy.

That being said, nearly everything I have read (especially Garrett Sutton's "Start your own Corporation) recommends if you are holding an asset, to do so in an LLC and if you are doing more "operations" such as management, wholesaling, flipping that is best done through an S corp.

Another thing, and I'm certainly not a tax advisor, is that if you are just holding an asset and collecting passive income from it, that should not involve any payroll taxes (again, from what I've read) so I don't think your concern is justified. If, however, you have an LLC where you are doing "operations" then all of that income flows directly to your personal return and would be subject to all payroll taxes. Instead, the recommendation is to use the S corp (or LLC taxed as S corp) to pay yourself a reasonable salary on which you have to pay the payroll taxes, and the remaining profit is not subject to payroll taxes.

I'd highly recommend reading the book I referenced above and then take that knowledge to your personal advisors to make sure they are on board with your chosen strategy.


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