Baltimore city rental in S-corp or LLC

4 Replies

Can anyone explain why I would hold a rental in Baltimore City in a LLC as opposed to an S-corp? I was told at the local REIA not to use a S-corp.

I'm paying cash for the property but may do cash out refi next year to reinvest in other properties. 

This is my first rental so thank you for the advice!

Hi David,

One of the main reasons that you would use an LLC rather than an S-corp for a rental is because of the cash out re-fi situation you mentioned. In an S-corp if you cash out re-fi and take more cash out of the company than what you originally put in this would be considered taxable.  In an LLC, the additional liabilities give you basis in the company and the cash out would not be considered taxable.   There are other reasons as well, happy to discuss in more detail.

David Powers CPA

@David Holland an LLC is more flexible than an S Corp. The main advantage to an S corp is that you can limit Self employment tax by declaring some of your income as dividends as opposed to earned income. If you are holding rentals there is no advantage to doing this as rental income is not considered earned income to start with.

The penalties for filing late for an S corp can be significant and the penalty for a LLC can be waived. You can probably figure out how I know that.

Obviously consult your tax adviser and attorney (I recommend Jeff Stoller for taxes locally) but in general hold rentals in an LLC. Other forms of real estate such as flipping an S Corp can have tax advantages.

@David Holland   I was all excited for a Baltimore discussion, but I guess this is a good question too. ;-) Hope to see you at some upcoming events.

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