What is the best tax structure to file as a husband and wife team for real estate investing?
It depends. There is not enough info here to give an accurate answer. In general, an LLC is a better choice than a partnership, but individual circumstances vary.
For taxes, an LLC is a pass through entity for a husband and wife, unless you specifically choose to be taxed as an S corp.
Updated 12 months ago
With an S corp, you'll file a separate return first, then it passes through.
When LLC is owned by husband and wife, LLC should file as a partnership, unless husband and wife live in a community property state.
Since you live in Louisiana, you don't have an obligation to create an LLC, and can qualify as a Joint Venture and report on Schedule E (split between husband and wife, so two Schedules E).
Hope this helps. Feel free to reach out with questions.
@Antoaneta Ortiz Establishing a Corporate Entity such as a S Corp or a LLC depends, on the nature of your REI Business. This is a relatively inexpensive process. I invite you to Google "Creating a LLC or S Corp in _____," "Division of Corporations in _____," or another phrase. You can go to http://www.sunbiz.org and see how Florida does things, to give you and idea what to look for, in a website. I invite you to please consider the following, from a Federal Income Tax Filing Perspective. I cannot stress the importance of finding a very good Investor Friendly CPA. Below are some things you may wish to consider, as to which Corporate Enity is best, for your Business Model as well as your REI Goals and objectives.
If the primary objective of your real estate business, or one of your real estate businesses, is to buy, potentially fix up an existing property and resell it within one year, the Internal Revenue Service can consider that to be an active trade or business. Unlike passive rental income, the income from an active trade or business is subject to self employment tax (a nasty 15% tax commonly referred to a "social security and medicare" by working folks). If your goal is to reduce that self-employment tax to a minimum, an S Corporation is the best entity to use. Why?
It is the only entity structure whose rules allow the business owner to take a “reasonable salary” (subject to social security and medicare) and then take the remaining profit (often as much as 50% of the remaining income) out as distributions not subject to self-employment taxes. Correspondingly, all business income taken from an LLC under similar circumstances is subject to self-employment taxes. For a business owner with $100,000 taxable annual income, the net tax savings for using an S Corporation instead of an LLC in taxes paid every year can be as high as $7,500.
When holding properties as a cash flow investor, the LLC (or LP) is generally the better choice because an LLC has more liberal distribution rules. The key here is flexibility. LLC distributions come out of the LLC at cost basis. The members of an LLC are issued K-1 Form and have to pay taxes on all profits as though it were income, which could expose the owners to high employment taxes. Also, an LLC can elect to be taxed like an S Corporation.
While there is never only one answer that is correct for all circumstances, there is a general rule that is almost always the correct choice. So remember, for legal and tax planning, a good CPA will recommend that clients hold their properties in an LLC or Limited Partnership and run their businesses as S Corporations to avoid self-employment taxes.
An LLC is treated for federal income tax purposes as a corporation, a partnership, or as a sole proprietor. You elect how you want the LLC treated for federal income tax purposes when you establish the LLC. An LLC treated as an S-corp and an S-corp are both pass through entities. This means that the business entity does not pay any income taxes on its net income, but instead, that income (or loss) is passed through to the owners or shareholders to be reported on their personal income tax returns.
What is best for you depends upon your investment strategy. A property flipping business may choose a partnership entity form over a sole proprietorship. A rental property business will probably avoid a corporate business entity.
This is a discussion you should be having with your own CPA, financial planner, tax advisor, insurance agent, and estate planner (preferably with all in the same room at the same time). The solution should be tailored to your unique circumstances and needs.
You received good advice, except from @Darrin Carey . Both of his statements were incorrect.
For taxes, LLC is not an alternative to partnership or S-corporation. LLC is a legal entity created for legal protection at the state level. It can then choose to be taxed at the Federal level either as a partnerships or as an S-corporation (both of which are pass-through entities for taxes).
A good analogy is a universal power tool. You essentially buy an engine (LLC). If you insert a drill bit into it - you have a power drill (partnership). If you insert a screwdriver bit - you have a power screwdriver (S-corporation).
You can bypass an LLC and create a partnership or a corporation at the state level, but it is rarely a good idea. Ask your lawyer if there're any benefits to this approach - which usually are not there.
Thank you for your huge help!!!
@Michael Plaks In the context of the question asked about taxes, my answer is correct, but not complete. An LLC and a partnership are the same from a tax structure perspective. A husband and wife LLC taxed as a partnership has all taxes paid on personal tax return. You gave the same answer in your post with some additional explanation.
Electing S corp status for an LLC may provide some additional tax savings by characterizing income on the corp return before passing it through to the personal return.
For tax purposes, just having an LLC without an S-corp election, is the same as not having an entity at all at the Federal level. Of course, the IRS has 1001 rules, if this, then that, and options that allow people to elect differently. Some states treat LLCs differently and may even levy a minimum tax simply for having one (Sorry, California).
The post by @Thomas Franklin , is excellent and gives a great detailed explanation.
As always, with a question like this, the correct answer is consult with a knowledgeable tax planner/CPA, and an asset protection attorney, preferably ones who also invest in real estate in your state. Knowledge and information is useful, but it must be applied correctly to the individuals specific situation and location.
On an unrelated note, don't have multiple windows open to BP when you're typing a response in the forum. I ended up posting the post above from the wrong window, and lost the more thorough response I had composed in a different window.
@Michael Plaks @Darrin Carey I like to use the Series LLC with anonymity trusts for the Asset protection piece and it has the secondary benefit of also being pass through ("disregarded") for the asset holding company. The S-Corp is only used to be a property manager and to avoid self employment taxes. What would happen is the Asset Holding LLC would pay the S-Corp a "property management fee" which is in turn paid to the real estate investor as a salary. Is it worth all the trouble? Typically only if your churning more than 50k through the S-Corp a year.
LLC > partnership.
For tax purposes, it can be treated as a partnership, but it has more legal protections.
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