The first property I bought, I bought it titled to my Revocable Trust. As I grow my portfolio, am I better setting up an LLC or a C-corp? I'm interested in your experience with either type of entity.
Generally, it’s not advisable to hold real estate in a C Corp. unless you are doing high liability/risk commercial properties, I’m in the camp of holding of holding the properties personally...
I’d be happy to chat if you like. Send me a direct message if you are unterested
Thanks so much for the response. Yes, I'm thinking of commercial real estate (warehouses, retail, etc.).
Then definitely use a LLC to limit/compartmentalize your liabilities. Don't forget your insurance.
C Corp = double taxation (corporate level tax and taxes on dividends)
LLC = pass through taxation (no corporate level tax)
So most pick an LLC as between the two
So your question should be: should I use a Company, a Corporation, a Partnership,... , and what taxation should I choose.
Regarding the structure, LLC may be cheaper in some states, with less mandatory formalities than a Corporation.
As a general rule, for buy and hold properties bringing passive income, it is often preferred not to be taxed as C or S corp, but to use Partnership or sole proprietor taxation.
For active income, it is often preferred to be taxed as C or S corp. Also be wary of wholesale and fix and flips that may have adverse tax consequences and need to be insulated in their own separate tax person (corporation) to avoid propagating to your other passive activities.
Now there are exceptions to every rules, and sometimes you may want to convert some of your passive income into active income to fund retirement account or to get a W2 to look more attractive to lenders.
For a typical buy and hold operation, you can also look at a mixed structure where each property is owned by a separate sole proprietor LLC that is owned either by you or a holding LLC. This holding LLC may be a partnership or a sole proprietor.
In addition you will have an entity (probably a corporation) taxed as a C Corp that will do property management and take a management fee from the properties. This entity will let you get all the fringe benefits of a corporation and write off most of your expenses, you may also decide to take a salary out of it for retirement purpose if you want in the future.
With that kind of structure you get the best of both world and can adjust every year what passive or active income you get, while maximizing the tax code advantages.
With these big concepts in mind, I would encourage you to consult with an asset protection and tax professional that can look holistically at your whole operation to guide you to the right structure. You can use the free 30 minutes consultations with some of the good real estate and tax attorneys firms often mentioned in this forum to review your plan.
@Sandra Shpilberg As a real estate investor, I want liability protections so you are in the right path with selecting an entity to hold your real estate.
As a tax lawyer, I want pass through treatment to leverage the tax benefits of my investments. C corporations have two levels of taxation and no pass through treatment.
Just my thoughts without knowing your specifics.
Thank you all for these great replies.