S corp for Real Estate Agent

Realtor · Boston MA · Member since 2016 · 67 posts · 9 votes

I have watched a youtube video that the CPA talked about forming a S corp and dump real estate agent commission into the S corp and pay less tax etc etc. my Question is, for most real estate agents, they are not the owner, they get 1099 with their SSN. How could this be done? How do they convert the commission income to the S corp to separate it from their W2 (if they have a regular job also) ?

Another question is, what about rental income? if the properties are under my name and I have a mortgage on them, is it possible to have the rental to run under an LLC or S corp? I think my goal is to separate my business/investment income from my W2 income to avoid paying too much tax.

any insight would be appreciated.

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Just as a summary in case this thread gets brought up again:

Having an S corp on earned income (comissions, sales, flips, wholesaling) Can save on payroll taxes, however I don't typically recommend it if earnings are under about $70k. The costs of an S corp for an additional tax return, payroll expense, full books, ect- often doesn't outweigh the savings if earnings are lower than that.

Rentals don't pay any payroll tax- and there are big downfalls to holding them in S corps as detailed above. Never keep rentals in S corps.

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Zachary Bohn
Accountant · Englewood, OH · Member since 2019 · 87 posts · 43 votes
7y
@Henry Li
Yes, you can setup an S-Corp for your real estate commissions, but the issue is that it will also require you to take a reasonable salary from the S-Corp. Some brokerages will either not send out a 1099 for the S-corp and then you just report all of the income in the S-Corp or if the brokerage will not do that and still sends a 1099 to the individual, they will show it on Sch C as both income and expense with the expense line saying "income reported under EIN#)
You can put properties in an LLC but if you have a mortgage on the properties you may trigger the due on sale clause. I would never recommend holding any properties in an S-Corp.
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Henry Li
Might be advantageous to use an LLC or corporation taxed as an S Corp for the real estate agent activity. Numbers need to be crunched to be sure. If your net taxable income from the real estate agent activity is less than $50k usually an S Corp won't make too much sense.
You'll want to check with your attorney -- some states don't allow real estate agents to transact behind a legal entity to my knowledge.
Generally rental real estate shouldn't be held inside of a corporate tax entity.
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Henry Li
OP
Realtor · Boston MA · Member since 2016 · 67 posts · 9 votes
7y
@Zachary Bohn
//but the issue is that it will also require you to take a reasonable salary from the S-Corp
So, double taxed?
so, real estate broker is okay to pay their real estate agent under EIN instead of SSN? I think this was my main question. Not sure if my broker knows the answer guess I should ask as well.
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Henry Li
OP
Realtor · Boston MA · Member since 2016 · 67 posts · 9 votes
7y
@Eamonn McElroy thanks. I'm a part time realtor so my average yearly commission before tax is on the edge of 50k. I'm glad you brought up the point. so what happens if my real estate sale income is less than 50k?
Does it mean LLC is more flexible/suitable? assuming my state allows brokers to pay real estate agents with their EIN instead of social.
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Weston Couch
Attorney · Austin, TX · Member since 2019 · 128 posts · 98 votes
7y
@Henry Li Hi Henry, I often hear these type of questions. That first one is more of a CPA question, but I think Zach addressed most of your potential down side with an S-Corp for that purpose, and yes, you'll want to check relevant state rules as Eamonn said.
As for the second question. You can absolutely put rental properties in an LLC(I work with people that do that every day), but you do need to use a certain strategy to put the property into the LLC (or a Series LLC if you want multiple properties) without having to deal with the due on sale clause issue Zach raised.
If you'd like more information or resources on that, feel free to connect with me.
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Henry Li
OP
Realtor · Boston MA · Member since 2016 · 67 posts · 9 votes
7y
@Weston Couch thank you. I think the biggest issue of the rental properties transfer into LLC(s) is that I have to get consent from my mortgage lenders. And I don't really know if transferring them into LLC actually give me enough benefits. I don't pay much tax from my rental properties because I have mortgage interest deduction, property tax, insurance.. repair ,, depreciation etc etc. and most of my rentals are condo, liability isn't high. i guess not worth the headache for now... but thank you very much for your info.
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Zachary Bohn
Accountant · Englewood, OH · Member since 2019 · 87 posts · 43 votes
7y
@Henry Li no you aren't double taxed when you take a salary from the S-Corp. The S-corp gets a deduction for the salary then you would have a W-2 from the S-Corp.
If your average commission is less than $50k, then the setup and maintenance of an S-corp most likely wouldn't save you enough to make it worth it. The only thing you will save on is the payroll taxes, and not income tax if you did go the S-Corp route.
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Henry Li
OP
Realtor · Boston MA · Member since 2016 · 67 posts · 9 votes
7y
@Zachary Bohn thanks!
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y
@Henry Li
1. I'm not an attorney at all, much less an expert in MA real estate law. But I believe that MA follows the common concept: real estate commissions can only be paid to state-licensed salesperson/agents or state-licensed brokerages. Brokerages can be LLCs or corporations, but salespersons are only individuals. If you as an agent (not a broker) form an LLC/S-corp, that LLC/S-corp cannot be licensed in MA.
If my interpretation is correct, then your brokerage cannot issue commissions and a 1099 to your LLC/S-corp, only to you, under your personal SSN.
2. You could still form an LLC/S-corp even if your 1099 is issued to you personally. It will require a tax reporting workaround described by @Zachary Bohn.
3. Your LLC/S-corp, however, is highly unlikely to generate you the tax savings described in the YouTube video you watched. There're multiple reasons which are all rather technical, so I will mention them but not explain:
- solo Realtors probably do not qualify for the S-corp tax game, because 100% of their income comes from their personal services. This is debatable.
- you do not make enough commissions to make the game worthwhile even if it was allowed
- if your other W2 salary is high enough ($100k+), there's very little room for tax savings thru an S-corp
4. Do not put your rentals into an S-corp.
5. Do not mix your rentals with your Realtor business, due to legal liability issues and Realtor compliance issues
6. You can put your rentals into an LLC, but there are some risks involved, such as due-on-sale clause and insurance. Attorneys suggest various ways to structure it and steer around these risks. I'm not an attorney, so cannot comment.
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Cliff T.
Rental Property Investor · San Francisco, CA · Member since 2016 · 215 posts · 42 votes
5y
Can anyone clarify... for your S-Corp's K1, do you retain your profit as ordinary income (Box 1) or distribute everything to yourself (I believe Box 12)? I'm running into a situation where a lender is saying that can only count Box 12, even though I own the S-Corp 100% and any ordinary income is mine.
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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
@Cliff T., I also have S corp tax status. How are you doing with your S corp? Are you holding rentals in the name of the S corp? I have 2 properties in the name of my S corp and wondering if that is a good approach. A few posts here say not to do that, but don't say why. My attorney & CPA advised me to use the LLC business structure with S corp tax status for lowest tax rates & maximum pass-through losses.
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Greg O'BrienBusiness Member
Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
4y
@J.C. Martel that is a common trap and these pros do not know real estate. Buy and hold RE in an S corp is an issue as you can’t really sell those properties without double tax.
An S corp mitigates FICA. But there is no FICA on rental income. Further, there are limits on passive income in an S coro that can result in a recocation (to a C corp).
Sorry to hear this happened but your attorney/cpa should have told you this.
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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
@Greg O'Brien, only the c-corp gets double taxation, not the S-corp. I’m thinking that real estate shouldn’t be in an s corp because a refinance or 1031 exchange would trigger capital gains tax. I wish I hadn’t structured the business this way!
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Greg O'BrienBusiness Member
Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
4y
@J.C. Martel the S corp requires a deemed distribution upon sale, thus triggeeing a layer of tax avoidable in an LLC. The property is distributed to you as an individual at FMV over cost basis. Then you sell, triggering a tax.
Im not sure I exactly follow you, but yes, selling property in an S corp will cost you more. Unfortunately, a lot of people have come to our firm with this situation. You also will not receive stepped up basis.
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Greg O'BrienBusiness Member
Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
4y
@J.C. Martel Re ordinary income, of course single tax but its useless bc you cannot have >25% Passive Income in an S. There is a benefit if you are a “flipper”.
I had said “upon sale” triggers that tax… Apologies if that was confusing!
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
4y
Just as a summary in case this thread gets brought up again:

Having an S corp on earned income (comissions, sales, flips, wholesaling) Can save on payroll taxes, however I don't typically recommend it if earnings are under about $70k. The costs of an S corp for an additional tax return, payroll expense, full books, ect- often doesn't outweigh the savings if earnings are lower than that.

Rentals don't pay any payroll tax- and there are big downfalls to holding them in S corps as detailed above. Never keep rentals in S corps.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
@Natalie Kolodij, the statement "never keep rentals in a s corp" is misleading. After talking with my CPA and attorney tonight, an s corp makes sense for me. I am a high income earner who would be taxed at 24-32% on my day job w2 income. My main focus is to reduce my tax burden. I also actively participate in my rentals, as justified by easily clocking 500 hours of active property management and scouting, also justified by having a RE license. An s corp gives me a corporate vail that an LLC could never provide, as LLCs are limited up to insurance maximums. LLCs do not protect personal assets nearly as well as s corps. Further, the risks of s corps that I face - 1) step up basis 2) triggering a transaction upon refinance 3) passive income from LTRs - are all avoidable. I have plenty of basis in my real estate and I am not borrowing beyond my basis. I can use an LLC designated as s corp for the refinance. My real estate income can easily qualify as active.

The point is that too many real estate blogs and forums say "never put real estate in an s corp", but in reality there are plenty of reasons why you would want to use an s corp for optimal asset protection and tax strategy. Further, it is important to note that s corp is just a federal tax designation. The state entity structure can be an LLC with federal tax status as s corp.
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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
I also want to add that we over-estimate the protection of an LLC. Just look at what's going on right now with the truck driver in Colorado. He got sentenced to 110 years in prison because the trucking company was an LLC, not s corp or c corp. LLC does not separate business and personal liability enough for my comfort level.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
4y
@J.C. Martel

It's your right to hold your properties inside your S-corporation if you insist. However, I will be the third experienced tax professional on this thread to repeat that it is a bad idea. Either your CPA does not understand real estate taxation or you did not completely understand his position.

You stated that your goal is to save on taxes, which happens to be everybody's goal, with the notable exception of Warren Buffet. S-corp will not save a single penny on your taxes as they relate to your rentals, however. This is because an S-corp does not change income tax at all, ever. The income is passed through the S-corp to your personal return and is taxed at the exact same rate as if you did not have an S-corp.

What S-corp is meant to save you is not income tax but Social Security + Medicare tax, aka Self-Employment tax aka FICA. Indeed, an S-corp can sometimes do that for your ordinary income, such as real estate commissions or consulting income. It CANNOT do it for you rentals, simply because your rental income is already exempt from those SocSec/Medicare taxes, with or without an S-corp!

Once again: your income tax on your rental income will not change after passing through an S-corp, and neither will SocSec/Medicare tax, because it did not exist to begin with! There is literally no tax advantage whatsoever in placing your rentals into an S-corp. None, zero, zilch. Income other than rentals - maybe, but not rentals.

In fact, there're known DISadvantages of placing your rentals into an S-corp, as mentioned by my colleagues earlier. It's also your right to deny them if this was indeed your advisors' opinion. I'm not going to debate this. Just don't be under the false impression that placing your rentals into an S-corp saves you taxes. It does not, plain and simple.

As far as placing your NON-rental income into an S-corp - it is also highly questionable. You mentioned that you're a high-income-earner. This means that you already maxed out on your 12% Social Security tax via your W2 job. You only have a 3% Medicare tax to (potentially) reduce with an S-corp, and only on your non-rental income. Even if it works, the savings may not be worth the game. Disclaimer: this last paragraph may become outdated once/if the current administration changes the rules for SocSec tax, as they have proposed.

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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
@Michael Plaks do you have any thoughts on the LIMITED liability aspects of an LLC versus a corp? One of the main reasons why my attorney wants me to use an s corp is to have optimal separation between business and personal assets.
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Dawn HeislerPro Member
Realtor · Northwest Georgia · Member since 2019 · 16 posts · 6 votes
4y
Best thing I ever did! I am an LLC with a Sub S Corp. I pay myself and my assistant through the same company who created the Smart Square for charging credit cards on your phone. They do everything including payroll taxes and our W2's at the end of the year. I pay myself a set amount. In my case $2000 every 2 weeks. $1000 goes into my bank account, $1,000 goes to pay taxes. I draw from the rest of my commission as needed. With my rentals and expenses for depreciation I now get a refund every year and save a ton in self-employment taxes.
1 Reply
Alexander Szikla
Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
4y
Sole Member LLC is your best move
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J.C. Martel
Investor · Lawrence, KS · Member since 2012 · 50 posts · 15 votes
4y
@Dawn Heisler - can you tell me more about your business that is structured as an s corp? How many rentals do you have? Short or long term rentals? Do you also do hard money lending, flipping, etc? Do you hold each property in an LLC with the s corp as the member as a disregarded entity or any structure like that? Do you hold title to the properties in your personal name, LLC or name of the s corp?

thank you!
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
4y
Originally posted by @J.C. Martel:
@Michael Plaks do you have any thoughts on the LIMITED liability aspects of an LLC versus a corp? One of the main reasons why my attorney wants me to use an s corp is to have optimal separation between business and personal assets.

I'm not an attorney, so my thoughts are worthless, as are those of anybody else who are not an attorney. Asset protection is highly controversial, even between attorneys, and is also state-specific.
For example, in my state of Texas, per my attorney friends, LLCs apparently have stronger protections than corporations. So when someone needs an S-corporation for tax reasons, they form an LLC and elect it to be taxed as an S-corporation. Legal protection does NOT come from the S-corporation election, it comes from the LLC nature of the entity. You seem to be confusing these two layers, legal and taxes.
Speaking of legal, combining your investment properties in one entity, as well as combining with your other activities such as realtor's, might present a legal liability risk. Which is not my area, not being an attorney.
Speaking of taxes, I will restate again: rental properties do not benefit tax-wise from being placed in an S-corp, and possibly even create tax disadvantages.

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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
4y
It blows my mind when MULTIPLE highly trained, experts in REI taxation comment

And people choose to ignore it and ask for advice of others who aren't professional just because it is what they want to hear.

Google "Should I keep rentals in S corps" And read the thousands of articles on the topics.

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
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