S -Corp, C -Corp , LLC

[Chuck Win]

I have 4 rental properties, All managed by 2 different Companies, One property is paid for, other three I have mortgage. My three mortages (3 different mortage companies) will not allow LLC or S- Corp, Question 1) I was told that S corp would give me a tax advantage ? by subtracting rents or maintenance cost from my W-2 job, I carry a Million liability on each property very cheap. Question 2) which Corp should be created and would I have to Refi or pay off the mortage to create a Corporation . Thank you

[Michael Plaks]

@Chuck Win

1. As a rule, corporations or other entities do not create tax advantages for rental properties. In fact, corporations can make your taxes worse, not better. LLCs usually leave you exactly where you were without an LLC, tax-wise: not better and not worse, except for the extra cost of creating and maintaining the LLC.

2. With or without entities, you always take your rental income and subtract your expenses: mortgage interest, property taxes, insurance, maintenance etc. You then subtract a tricky number called depreciation, which is a separate conversation. The result is your net income (if expenses and depreciation are less than rents) or net loss (if expenses+depreciation exceed rents). With 3 mortgages, you're likely to have an overall net loss. 

3. If you have net income, you pay additional taxes. If you have net loss, it sometimes may be used against your W2 income, but not always. Entities do NOT change any of that.

4. The reason you create LLCs as a landlord is not to reduce taxes, because they cannot do that (with rare exceptions). You create LLCs for legal protection. How much legal protection they actually provide is a highly debatable topic, and you should ask attorneys (even though they tend to disagree between themselves). Of course, everybody has an opinion. I'm not an attorney, so my opinion on legal protection is useless, just like opinions of everybody else who is not an attorney.

5. If you create an LLC and transfer a property from your personal name to an LLC, your lender may or may not have an problem with it. This is another controversial issue, with plenty of opinions. Ultimately, it's up to your lender. Many lenders do not mind transfers to single-member LLCs owned by one person or by married couples. 

6. There're some advanced ways to reduce your net taxable income from rentals if you need it, ways to transfer properties into LLCs and generally ways to run your real estate business better. These call for professional help, especially when your understanding of tax and legal issues is limited and you have been getting bad information.