🚫 Top 5 Reasons NOT to Put Your Real Estate into an S-Corp 🚫

So you've heard that S-Corps can offer tax benefits and are thinking of using one for your real estate investments?

Stop right there!

While S-Corps may be ideal for certain types of businesses, they're generally a bad idea for real estate for several crucial reasons.

1. Depreciation Loss Limitations

With an S-Corp, you'll likely miss out on one of the most attractive benefits in real estate: depreciation losses. S-Corps have stringent basis rules that often suspend losses—something you wouldn't face in a partnership or Single Member LLC (SMLLC).

2. Cash-Out Refinance Taxes

Planning to do a cash-out refinance? With an S-Corp, you're probably looking at a taxable distribution due to the restrictive basis rules. Unlike partnerships that allow for mortgage-debt-basis (resulting in a tax-free distribution), S-Corps limit your basis to take losses and distributions.

3. Asset Mobility Issues

Think you can freely move assets in and out of your S-Corp? Think again. Unlike partnerships or SMLLCs, taking property out of an S-Corp requires you to recognize gain on any appreciation (or depreciation recapture).

4. Raising Capital? Good Luck!

If you're considering bringing in investors, an S-Corp severely limits your options. Due to the one-class-of-stock rule and the inability to structure waterfall distributions, you'll be far less competitive than others who use more flexible entity types. Seasoned R/E investors will avoid investing through an S-Corp like the plague.

5. Self-Employment Tax Myth

One common reason people choose S-Corps is to avoid self-employment tax. Guess what? Real estate income isn't subject to self-employment tax, regardless of the entity you choose.

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These are just five reasons, but there are plenty more. Got any you can add to the list?

🗝Need guidance on structuring your real estate investments? Don't hesitate to reach out for tailored advice