LLC vs. S Corp for buy and hold

9 Replies

Hi Everyone,

In searching through the forums I have seen people say regularly that LLC is preferable to an S Corp for passive business income like buy and hold. My question is why?

I ask because I already have an S-Corp and I'm considering moving my rental into it, but being the typical recommendation is LLC I need to figure out if forming an LLC for the rental is a better move. My attorney said that either would protect my interests from liability to a satisfactory degree, and I will of course talk to my accountant when he returns from vacation next week. I'm just trying to gain some knowledge before going into that conversation.

Thanks

Lance H

Originally posted by @Lance H. :
Hi Everyone,

In searching through the forums I have seen people say regularly that LLC is preferable to an S Corp for passive business income like buy and hold. My question is why?

I ask because I already have an S-Corp and I'm considering moving my rental into it, but being the typical recommendation is LLC I need to figure out if forming an LLC for the rental is a better move. My attorney said that either would protect my interests from liability to a satisfactory degree, and I will of course talk to my accountant when he returns from vacation next week. I'm just trying to gain some knowledge before going into that conversation.

Thanks

Lance H

Long term real estate should NEVER be held by a corporation. Look up some of my posts relating Corporations and long term real estate. The biggest one is debt financing/refinance can cause a taxable transaction to occur.

LLC or personal name. In both cases insure very well.

For active businesses a corp makes sense.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

There are a couple of reasons you'd want to hold real estate in an LLC over an S-Corporation. First are the basis rules and being able to deduct real estate losses. Second, if you sell later and want to distribute the money out, it could cause additional tax under an S-Corp. And third, like Steven says, if you do a cash out refinancing, the distribution there could also create a taxable event.

Thank you @Steven Hamilton II and @Brian Borawski for your responses, that really clarifies things for me that it will make more sense to either convert my S corp to an LLC or just open a new LLC

One More question if you could...

Part of my business will be controlling properties via rent to own and then subleasing them out for slightly more until I decide whether to purchase the house or not. Being that I don't actually own the home, is there any advantage in holding it in an S corp or am I still just as well or better off holding it in the LLC?

Thanks again for your help!

Not that I can think of. It won't hurt you (to hold it in an LLC) if you don't buy the house but if you do buy the house, you'll then run into the same problems that we've talked about.

Just curious but what state are we talking about? Some states (like CA) have pretty rough LLC fees..

That makes sense. I just wasn't sure if the income would still be considered passive since I wouldn't own the asset. Even if it isn't considered passive I'm thinking sticking to 1 LLC for now will be the way to go.

Thanks again.

Originally posted by @Lance H. :
That makes sense. I just wasn't sure if the income would still be considered passive since I wouldn't own the asset. Even if it isn't considered passive I'm thinking sticking to 1 LLC for now will be the way to go.

Thanks again.

I don't have a ton of time to explain. But I will say in many states it is considered malpractice to advise someone to hold long term real estate in a corporation.

I'd recommend looking at an LLC for the rental, ad keeping your S-corp for whatever you use it for. Remember by combining them you are exposing each to more liability.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

This post has been removed.

@Lance H.

@Steven Hamilton II

Never say never ;)

Lance, there are a couple of issues here, and you have to decide what is important. The Fannie rules state that ANY financed property held by a person counts against the ten-limit. I purchased several C class properties with cash with the intent to refinance with a local bank using commercial lending. If I would have refinanced them in my name, each of those mortgages would have showed up on my credit report and I could have only financed the remaining number up to ten with fannie/conventional loans. You want to pay attention to debt-sequencing, it will make or break your strategy as you accumulate more properties.

Since C properties cost 30K, financing those properties would have been a waste of that good, 30-year fixed rate loans. Save those loans for more expensive properties in order to maximize your cash down payments and leverage.

As I started purchasing A properties, I used by conventional and commercial lending, but in all cases, when commercial lending is used, I acquire the property through the S corp. My corp and I own 25 properties, but had I not sequenced this properly, I'd be stuck at ten (and the first nine were the C class properties!), and would only be able to use commercial lending for 11+. I would have WASTED nine fannie loans.

As others have mentioned, you cannot transfer properties out of an S corp without incurring a 'sale' and paying capital gains tax. However, if you are using commercial lending and want to protect your ten fannie loans, you must keep the properties in the S corp. If you sell to someone other than yourself, then the sale is treated no differently than if you held it in your own name or that of an LLC.

There is NO problem to refinance a property held in an S corp if you used commercial financing to start with. People need to be clearer when talking about refinancing--they are usually talking about refinancing with a fannie loan. Yes, in that case, you would have to transfer the property out of the S corp to refinance it because fannie rules only allow mortgages in a person's name, and then that transfer out of the s corp is a 'sale.'

Accountants and attorneys sometimes look at these things through one lens. You need to have your plan laid out so that you can pull the advice of ALL parties. You need to talk to a top-notch mortgage broker when you are talking about loan-sequencing, fannie rules, etc.

Originally posted by @Steve Endress :
@Lance H.

@Steven Hamilton II

Never say never ;)

Lance, there are a couple of issues here, and you have to decide what is important. The Fannie rules state that ANY financed property held by a person counts against the ten-limit. I purchased several C class properties with cash with the intent to refinance with a local bank using commercial lending. If I would have refinanced them in my name, each of those mortgages would have showed up on my credit report and I could have only financed the remaining number up to ten with fannie/conventional loans. You want to pay attention to debt-sequencing, it will make or break your strategy as you accumulate more properties.

Since C properties cost 30K, financing those properties would have been a waste of that good, 30-year fixed rate loans. Save those loans for more expensive properties in order to maximize your cash down payments and leverage.

As I started purchasing A properties, I used by conventional and commercial lending, but in all cases, when commercial lending is used, I acquire the property through the S corp. My corp and I own 25 properties, but had I not sequenced this properly, I'd be stuck at ten (and the first nine were the C class properties!), and would only be able to use commercial lending for 11+. I would have WASTED nine fannie loans.

As others have mentioned, you cannot transfer properties out of an S corp without incurring a 'sale' and paying capital gains tax. However, if you are using commercial lending and want to protect your ten fannie loans, you must keep the properties in the S corp. If you sell to someone other than yourself, then the sale is treated no differently than if you held it in your own name or that of an LLC.

There is NO problem to refinance a property held in an S corp if you used commercial financing to start with. People need to be clearer when talking about refinancing--they are usually talking about refinancing with a fannie loan. Yes, in that case, you would have to transfer the property out of the S corp to refinance it because fannie rules only allow mortgages in a person's name, and then that transfer out of the s corp is a 'sale.'

Accountants and attorneys sometimes look at these things through one lens. You need to have your plan laid out so that you can pull the advice of ALL parties. You need to talk to a top-notch mortgage broker when you are talking about loan-sequencing, fannie rules, etc.

Steve,

The problem is if you pull cash out. First of all, debt does not add to your basis in an S-corp. If you simply refi to better terms or a longer amortization period that is fine. but a cash out is a problem.

An S-corp is a better option than a C-corp; however, if it can be avoided I recommend it. You will find that there are some serious flaws to contend with. I'd recommend going with a partnership between two people and then commercial loans. In a partnership debt does add to basis.

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net