Can a S Corp use real estate to help with taxes?

Question

Hey BP! I work for my brother who owns a rental company for heavy equipment in Sacramento. We are getting killed with taxes and fees for the equipment we own.

Is there a way to use real estate for some tax relief? If there is a way then I would be able to start a new division in the company and do what I love. Thoughts?

Michael Plaks · Answer

The shortest analogy: it's like getting married for the cooking.  ;)

Michael Plaks · Answer

@Kris Zabish

1. You might get some tax benefits by holding rental properties. Not flipping, holding.

2. If you do so, it should not be done inside an S-corp. You will need another entity for that, most likely an LLC taxed as a partnership.

3. Buying rentals strictly for tax benefits is wrong. They are acquired for long-term appreciation and/or current cash flow. Tax benefits are only the icing on the cake.

4. You should explore tax saving strategies on your existing equipment rental business, if not already.

5. All of that is case-by-case and needs a tax expert.

Ashish Acharya · Answer

@Kris Zabish ,

Looks like you already have an S-corp that is helping you avoid SE taxes on your net Income.

Few things:

1) Try to find a reasonable way to increase a reasonable salary for the owner without getting taxed. Such as getting Health insurance via an S-corp. That will increase your W-2 wage, but you also get a deduction at a personal level. So you get an increase in the wage without a tax impact.

2) I hope S-corp has a retirement plan set up. Profit sharing plan can shield around 60k of income.

3) Hopefully, you/brother also have IRA and HSA to decrease your AGI.

4) You can lease the property to your corp allowing withdrawal of cash from the business that is not subject to FICA (rather than paying yourself a compensation).  A good thing about this is you will also get 20% pass-through deduction on the rental activity if grouped correctly with the S-corp.

5) You can also net the rental loss with the Busines income to decrease your net income.  The ownership of the LLC holding the property should be same as the s-corp. And the activity should not be more than 20% of S-corps activity. There are other rules that your professional will help you understand.

5)Also, self-insured medical reimbursement plans and deductible educational assistance plans for legitimate family-employees can reduce taxes.

6) Also, there are many many credits that you might qualify. Need to know the actual operation. For eg.  As this is family business and very flexible, you could Claim the Credit for Employer-paid Family and Medical Leave. You might already be taking leave without getting the benefit of the credit.

As you can see there are many ways to manage taxes, you just need to sit with the tax planner and give him the detail.

Brian Schmelzlen · Answer

Real estate can be a great tool for tax planning.  However, a lot of those benefits come as the investments grow and not necessarily up front.

However, for a real estate professional it is possible to get huge write-offs immediately.  For buy and holds, you are entitled to depreciate the full cost of the property (less the portion allocable to land), and not just the down payment (i.e. if you buy property for $1 million but only pay $200,000 the full $1 million is depreciable- as long as none of that is allocated to land).  However, that is normally over 27.5 years or 39 years depending upon the type of property.  If you get a cost segregation study though that identifies a significant percentage of the property is actually personal property with a 5, 7, or 15 year life you would be able to depreciate it much faster- perhaps even in the year of purchase with the new accelerated depreciation rules.  So in that same example, if 20% of the building could be reclassified as personal property through a cost segregation study that means potentially there would be a $200k depreciation expense.  That might mean a large tax write-off IF the owner is a real estate professional (otherwise passive loss rules apply).

Since your brother owns another business it is doubtful that he would be able to qualify as a real estate professional, but if he is married his spouse might.  If his spouse qualifies as a real estate professional, they could purchase the commercial property the business is located at and rent it to the existing business at a fair rental rate.  That MIGHT generate tax savings in the year of purchase.

NOTE: Your brother should talk to his CPA about this before considering doing it himself.

Bill S. · Answer

Kris,

@AshishAcharya seemed to have very sound accounting advise. Others went on about depreciation on rental properties, not a rental equipment business. At least that;'s what I gathered.

Regarding depreciation deductions on the business, you can potentially benefit from cost segregation based on the rental company buildings/property. There are a number of factors to consider; how long your brother has owned it, value of the property, type of building and specialty options (charging stations for electric equipment, etc.), fencing and security systems, and numerous other factors.

You should have a contact professional Cost Seg firm to discuss and provide you with a Feasibility Analysis accordingly.

Hope this helps, Bill

Kris Zabish · Answer

Thanks guys! Very helpful

Kris Zabish · Answer

Thanks @Michael Plaks! Might I ask why buying rentals as a tax strategy is wrong? I hear the podcast state that Depreciation is a builder of wealth, am I misunderstanding what they mean?

Can a S Corp use real estate to help with taxes?

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