need help!!!

11 Replies

hi everyone! we need your help to choose the business entity that is appropriate to our goals in REI.
my partner and i are focusing on multifamily home rentals with sec8. we are trying to build passive income and maybe do flips on the side in illinois where we reside. do you think we should incorporate our business name with LLC or S-corp?

I'm not a lawyer, but my lawyer recommended a series LLC for us. We are designating one "cell" as an S Corp if we flip homes. The others we will use for our rentals.

Consult an attorney and a CPA to determine what is best for your specific needs.  If you have a lot of assets to shelter, then having some kind of entity may be worthwhile.  I always do find it funny though the people who have zero assets and that are worried about asset protection.

How you chose to finance the properties will also come into play. Residential mortgages do not allow for a company to own the property, must be in individual names.

Generally most use LLC's for buy and hold, as there is less paperwork required each year than an S-Corp.

@Mike Wood makes some good points. You will definitely want to consider financing. Residential loans are much cheaper and can be easier to obtain. If you are concerned more about liability than a tax shelter, consider a large umbrella policy on your homeowner's insurance. 

If you are looking to lessen your tax accountability my research indicates that a S-Corp offers more tax advantages than a LLC.

Originally posted by @Michael Maicad :

hi everyone! we need your help to choose the business entity that is appropriate to our goals in REI.
my partner and i are focusing on multifamily home rentals with sec8. we are trying to build passive income and maybe do flips on the side in illinois where we reside. do you think we should incorporate our business name with LLC or S-corp?

 NEVER EVER hold real estate long term in an S-corp or C-corp.

You will most likely want to hold that rental in a partnership between the two of you.

For an accountant do not feel like you need to use someone local. Many of us accountants have clients worldwide. Payroll, bookkeeping, etc can mostly be done remotely.

Here is a great list of questions to ask a potential accountant:http://www.biggerpockets.com/forums/51/topics/70447-questions-to-ask-a-cpa

Also check out the www.NAEA.org page in your search. It should help you find someone local. If someone comes to me, I'll send them your way.

If you need help in your search or want to verify something don't hesitate to ask.

For example: I have clients worldwide and things are just as easy as I e-mail them, talking on the phone. I even use Skype and TeamViewer to communicate with clients so I'd highly recommend looking for one of the best with great references that interviews well with you.

So look for someone you can connect with that works out for your situation.

Feel free to ask here if you have questions.

@Ralph Hunter - I'm sure @Steven Hamilton II will circle back around and answer, but I thought I'd put my .02 in for not holding real estate in an S-Corp.

Following is an excerpt from a post I wrote a couple of months ago on a similar topic:

First of all, in a C-Corp, all income is taxed at the same rate regardless of the nature of the income. It doesn't matter whether it's interest, dividend, passive, capital gains - it's all taxed at the same (fairly high) rate. Then, when the cash or other assets are distributed to the shareholders as dividends, it is taxed again at the shareholder level.

In an S-Corp, it is possible to maintain the nature of the income and pass it through to the shareholders such that capital gains flow through as capital gains, etc. However, the big issue, is that you cannot have more than 25% passive income in your S-Corp. You pass that limit (for three consecutive years. A one-off is ok) - your S-Corp automatically converts to C-Corp, and you're taxed at the corporate level at the corporate rates (you then lose the capital gains rates, personal brackets, etc). So if your goal is to try to maintain the passive nature of real estate activity, it can backfire on you if you are not a real estate professional.

***

Some other issues are:

1.  When you distribute appreciated real estate from an S-Corp to an individual owner, it is taxed to the owner, even though no cash has been received by the owner.

2.  If you have a cash gain, but a tax (paper) loss - usually due to depreciation - the losses you can take through an S-Corp may be limited.  This is particularly true if there is a mortgage on the property.  Shareholders losses are limited by their basis in the S-Corp and a mortgage can significantly lower available cash distributions.

3.  An S-Corp can only have natural persons as shareholders.  Trusts, other corps and LLCs cannot be shareholders, so people who are trying to gain anonymity are unable to do so as at least one natural person shareholder needs to be registered with the Secretary of State (in most states).

There are several additional reasons, but honestly you could write a book about it.  These are the major ones.

@Linda Weygant Thank you for providing some insight on this. I had used an S-Corp for a real estate related business (though no real estate was held in it). The tax benefits saved me tens of thousands of dollars. But it looks like those benefits do not extend to held real estate. Thanks again.

An S-Corp is awesome for flipping when you're holding real estate as inventory for sale.  Holding it for investment purposes in an S-Corp is what triggers what I mentioned before.

If you're flipping in an S-Corp and you have a property that you want to then keep, it's best to transfer it off to another entity in some manner, whether that's a sale or a transfer or whatever.

One of the big reasons not to hold RE in a corporation is the tax consequences of refinancing. If you refinance and pull money out, you will create a tax burden. Partnerships use loans as basis whereas a corporation does not. This means you can easily withdraw proceeds from a refinance.