"Rental Property" LLC held in "Property Management" S-Corp

[Robert Shedden]

I am asking the basic question of "LLC or S-Corp for Rental Property?" but with a twist....

I am working to acquire my first rental property in Rockford, IL and was planning to set up an LLC to hold the properties... A colleague of mine suggested setting up an S-Corp for a property management corporation. Then, hold multiple rental property LLCs within the S-Corp. (Please bear with me, as I'm just diving in to the legal and tax strategies related to REI...) But, I believe the plan was to have the LLCs pay the S-Corp for services. Also, all the profit from each LLC would flow to the S-Corp. Finally, I could receive shareholder distributions from the S-Corp, thus severely limiting my tax liability from the rental property income.

Is there any validity to this? Any legal implications? I know I would need to look at the tax savings versus the additional fees for multiple entities...Please post thoughts or questions for a great discussion!

-Rob Shedden

[Ashish Acharya]

@Robert Shedden , 

This does not give you are the result what you are expecting because you, like most of the people, are missing the basic concept of taxation.

 You are saying since you are taking a distribution from S-corp thus, there is no taxable income. That is a flawed understanding. Distribution and net -income are two different concepts.  You can have 100k of net rental income in the S-corp that is driven from all the LLCs rentals, and you can take out entire 100k as distribution, but you will still pay taxes on the 100k of the rental income. Taking our distribution does not shelter your taxes. When you take a distribution of the already taxed rental income, then you dont pay taxes. That is why distribution is not taxed because you already paid the taxes on the income that generated your distribution. If you had no rental income, there would be no cash for distribution. 

Since S-corp will own all the LLCs, the net rental income will be reported in the S-corp tax return. You will owe the same amount of tax in both the cases (holding Rentals in LLCs or holding those LLC in the S-corp). All the income will flow through the LLC to S-corp to you.