Hold rentals in S-corp?

[Larry Flanagan]

I am buying a house this week that I plan to hold for a while as a rental.  I plan on paying cash for the purchase, rehabbing, then refi'ing.  Is holding personally or in S-corp most tax advantaged?  One issue is most of my liquidity is in the S-corp, so I will need to either distribute cash to myself to fund a personal purchase, or make myself a loan to be paid back upon refinancing.

Also, I have another property in the S-corp that I had intended on flipping but now want to keep.  Should I keep it in there, or transfer title to myself?

[Brandon Hall]

@Larry Flanagan I would not hold a rental in your already established S-Corp for two reasons: (1) holdings rentals in a corporation can set you up for tax failure. S-Corps are a bit more lenient here, but still create tax complications that you don't need; and (2) I would not want to subject my current business to liability brought on from my rental or flip.

You know how everyone says "don't co-mingle personal and business funds?" Well I also like to say: don't co-mingle separate businesses. It's not necessary to expose the businesses to each other's liabilities.

Additionally, because an S-Corp is a pass through entity, you have already paid taxes on all profits. Therefore, a distribution is not taxable. If I were you, for simplicity, I would take a distribution from the S-Corp and call it a day.

@Bruce Coulliette Passive income cannot offset active income regardless of whether the passive income is generated in your personal name, an LLC, partnership, or a corp. Therefore, holding rentals in your S-Corp in hopes of using the losses to offset your active income is not an appropriate strategy.

Unless: You can qualify as a real estate professional and demonstrate material participation in your rental activities. Since you are a realtor, you likely meet the threshold to qualify as a real estate professional. The next question is - how much time do you spend on your rentals annually?

If you qualify as a real estate professional and demonstrate material participation in your rentals, you can use your passive losses to offset your active income without limitations. If you cannot demonstrate material participation (or you are not a RE Professional), then you are limited to an annual $25k loss which is phased out at $100k MAGI if single, $150k if married filing joint.

Regardless, an S-Corp is a pass through entity so you do not have to hold your rentals in the S-Corp in order to apply losses to your active income. You can hold your rentals in your personal name or in a separate LLC and the losses can still be used to offset your S-Corp income. Because of this, I would again not want to co-mingle two separate businesses and the corresponding liability each brings on.

Hope this helps!