S- Corporations for rental property

Real Estate Deal Analysis & Advice
6yFollow

S- Corporations for rental property

Jesse Richards
Redlands, CA · Member since 2019 · 5 posts · 0 votes

Hi Guys,

I am new to this group.  I have a couple rental properties and I was advised by my cpa to retitle them in my S-corp.  He also wants my to have my rent paid to the S-Corp and start paying all of the bills for the rentals out of the S-corp Bank account.  I like the idea of paying all of the expenses out the the Corp Bank account, but I am unclear why I should retitle the Properties in the corp name.  Do you any of you guys us S-corps for you renetals?  If so why and how?  Thanks

0Reply
82 views

Most Popular Reply

Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y

You almost NEVER want Rentals in an S corp. 

There is NO tax advantage, and often there can be a ton of negatives. I would recommend a new CPA over this advising. 

The reason an S corp saves you money is by allowing a salary and in exchange we can reduce self employment taxes. But rentals already don't pay self employment tax. 

Google "Why you shouldn't keep rentals in an S corp" and read the first page or articles on it there. 

I know Tax pros who even refer to recommending the S corp for rentals malpractice. 

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
WebsiteView Page
4Reply
See this reply in the discussion

26 Replies

Jump to latestLatest
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    I don't know anyone that uses an S Corp but I use, and know many people who use, an LLC. My LLC is the owner of all my properties and rent is made out to the LLC and bills are paid out of the LLC checking account.

    0Reply
  • Jesse Richards
    OP
    Redlands, CA · Member since 2019 · 5 posts · 0 votes
    6y

    Thanks for the input. Yeah I don't understand the differences too well. What is the benefit of having your properties in the LLC? Is it strictly a liability issue or do you find you get a tax advantage?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    You almost NEVER want Rentals in an S corp. 

    There is NO tax advantage, and often there can be a ton of negatives. I would recommend a new CPA over this advising. 

    The reason an S corp saves you money is by allowing a salary and in exchange we can reduce self employment taxes. But rentals already don't pay self employment tax. 

    Google "Why you shouldn't keep rentals in an S corp" and read the first page or articles on it there. 

    I know Tax pros who even refer to recommending the S corp for rentals malpractice. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    4Reply
  • Jesse Richards
    OP
    Redlands, CA · Member since 2019 · 5 posts · 0 votes
    6y

    thanks Natalie,  

    I need to read more about this issue.  

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Jesse Richards:

    thanks Natalie,  

    I need to read more about this issue.  

     Definitely 

    Most people hold rentals in an LLC or trust

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y

    Land trusts with your llc as beneficiary 

    1Reply
  • Jesse Richards
    OP
    Redlands, CA · Member since 2019 · 5 posts · 0 votes
    6y

    Thanks Dennis

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    All my properties are in an S corp. they are titled this way as the original property that was owned was held in a C corp. (was owned for a long time by my father who had his own ideas) ,.... so when I took possesion (via a complicated legal structure) the only good option we had was to do a S corp due to massive capital gains tax.....

    Anyway, my point is - there may be underlying reasons why and I would ask your CPA for their reasoning before firing them. They understand your unique situation. 

    0Reply
  • Jake HottenrottPro Member
    CPA · Belleville, IL · Member since 2014 · 255 posts · 269 votes
    6y

    Whew, that first sentence made my CPA senses tingle.  Now, @Mary M. brings up a valid point that sometimes there is a very good underlying reason for something.  There is almost never a 100% tried and fast rule especially in tax, that's why most tax professionals give a general rule on here but also say "it depends", because it does, to your specific situation.

    @Natalie Kolodij does hit the nail on the head with noting that its almost never advisable to put rentals into a S-Corp, but this is why you need to ask your current tax professional why they recommended it and potentially schedule a paid consultation with someone else to get a second opinion.

    Best of luck and welcome to BP!

    1Reply
  • Jesse Richards
    OP
    Redlands, CA · Member since 2019 · 5 posts · 0 votes
    6y

    Thank you all for our input.  I really appreciate it.  I was told that I should access corporate credit with my S-Corp.  I can see this as being useful for doing a flip or buying a car.  I am still unsure of what is wisest.  

    Also can I collect the rent payable to my corp without retitling the property into the corp?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Jesse Richards:

    Thank you all for our input.  I really appreciate it.  I was told that I should access corporate credit with my S-Corp.  I can see this as being useful for doing a flip or buying a car.  I am still unsure of what is wisest.  

    Also can I collect the rent payable to my corp without retitling the property into the corp?

    If his only reason for suggesting an S corp is to "access corporate credit"

    A. That's not tax advice. 
    B. It's actually potentially really bad tax advice

    C. That's not how lending works really. Maybe a lender can comment on if there would be a benefit but I don't believe so.

    Do you want to pay higher interest rates on all of your property loans? Any chance you'll ever want to refinance them at non commercial rates and transfer them to your name? S corp puts a cap on all of that without creating a taxable event. 

    It's true that there's no one size fits all- but S corp on newly acquired properties/ those currently in no entity is almost never the answer. 

    Also- if you're doing flips, those SHOULD likely  be in an S corp. And separate from the rentals typically. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    0Reply
  • Josh Dixon
    Accountant · Frisco, TX · Member since 2019 · 16 posts · 4 votes
    6y

    Hi @Jesse Richards, I agree with @Natalie Kolodij, that if you are flipping real estate then it might make sense to use an S-Corp. But if you are planning to do rentals, then an LLC or partnership is the best way to go. If you are planning to do both, then might want to have separate entities for each activity.

    One drawback to S-Corps is that you would have to pay your self a reasonable salary from the S-Corp and that would negate some of the tax benefits of having rentals., whereas you would not have to in an LLC or partnership.

    1Reply
  • Scott Roy
    Contractor · St. Louis, MO · Member since 2019 · 12 posts · 17 votes
    6y

    @Jesse Richards The only real advantage to having an LLC taxed as an S - corp is no self employment taxes. It is far better to do a normal LLC. I used to think LLC taxed as an S - corp, but for REI stick with the default tax set up for LLCs. Many more advantages.

    You can set up a separate LLC for each property, or group of properties, to further asset production and then form a main LLC to be a holding company (it owns the other LLCs) if you want. In some states, about 13, there is such a thing as a Series LLC. It is similar to having a holding company that owns other LLCs. Except that it is one LLC and each series in it is like another LLC. The one major draw back is that this type of business structure is still new and not available in all states. Though if you only want to do business in one state for now, I think it might be a good option to try.

    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    I have a question: isnt self employment tax what pays into social security? And wouldnt one want to be paying into this  if rentals are your sole /majority of your income? 

    1Reply
  • Chris A.
    Accountant · los angeles · Member since 2016 · 24 posts · 9 votes
    6y

    Never use a s-Corp if you plan on holding the rental for more than one year. S-corps taxes are more favorable compared to personal short term capital gains but less favorable then personal long term capital gains rates.

    Usually having an LLC or having it in your own personal name is more beneficial than a c or s Corp if held more than one year.

    S-Corp or C-Corp are usually for property flippers.

    0Reply
  • Scott Roy
    Contractor · St. Louis, MO · Member since 2019 · 12 posts · 17 votes
    6y
    Originally posted by @Mary M.:

    I have a question: isnt self employment tax what pays into social security? And wouldnt one want to be paying into this  if rentals are your sole /majority of your income? 

    "Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves...The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)."

    https://www.irs.gov/businesses...

    The default way LLCs are taxed is the same as a Sole Proprietorship or a Partnership. Sometimes people say LLCs have a pass through tax, because the owner(s), called members, claim all the income on their personal taxes. What essentially happens is you pay higher SS and Medicare taxes than if you were working for someone because employers pay half of those taxes for you. This happens as well with an S - Corp, though some earnings can be paid to the shareholder(s) as a distribution. Since these distributions don't count as wages, there are no taxes taken out of for SS and Medicare.

    Whether or not someone wishes to pay these taxes and why is a different matter.

    0Reply
  • Sylvia B.
    Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Mary M.:

    I have a question: isnt self employment tax what pays into social security? And wouldnt one want to be paying into this  if rentals are your sole /majority of your income? 

     Sure, if you can't think of a better way to put 15% of your income to use. (But surely you can . . .)

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    Re:SS most people will not become able to be self supporting in retirement, so having paid into SS over a lifetime is a good hedge plus its part of our compact as a society.  

    0Reply
  • Matt Ward
    Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
    6y

    @Mary Mitchell self supporting yourself in retirement is a widespread reason why people buy cash flowing rentals, no?

    2Reply
  • Sylvia B.
    Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Mary M.:

    Re:SS most people will not become able to be self supporting in retirement, so having paid into SS over a lifetime is a good hedge plus its part of our compact as a society.  

     Paying income taxes is also "part of our compact as a society." So, do you look for ways to pay as much as you can, or try to minimize your tax burden?

    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    @Sylvia B. i pay what is required of me and feel that taxes are just one of many things that allow this great society to flourish. 

    @Matt Ward yes, of course.... but how many 100/door rentals will it take to support a lifestyle one is accustomed to?  There of course will be those that wont need any SS (i wonder if they just refuse it?), but the majority will need help in retirement....  therefore I feel that its important to contribute - and of course it isnt 15% of revenue, it is 15% of income after all deductions etc. :j

    Happy thanksgivng to you!

    0Reply
  • Sylvia B.
    Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Mary M.:

     and of course it isnt 15% of revenue, it is 15% of income after all deductions etc. 

    Actually, it isn't that simple. Income from rentals is passive rather than earned. Only earned income is subject to SS tax. You cannot just decide to pay self-employment taxes on your rental income.

    If your rentals are owned by an S corp, you must take a salary from that entity to convert company funds to personal funds. The S corp withholds SS and other taxes from your paycheck. It must file the appropriate forms with various state and federal agencies monthly, quarterly, and annually. It matches the employee portion of the SS tax and also pays federal and state unemployment tax. When the tax returns (both federal and state) are filed (March 15 deadline) the income of the entity is divided among the owners and reported on schedule K-1. From there it goes on the individual's 1040 and is used to calculate self-employment tax. Yes, you owe that 15% on the income of the S corp, even if that income never makes it to your pocket.

    Now this is just a quick and dirty explanation, and lots of details were left out, but you get the idea.

    So if you want to pay more taxes, spend time and money doing more paperwork, deal with more government agencies, and complicate your business all so that our great society can flourish, more power to you. 

    1Reply
  • Scott Roy
    Contractor · St. Louis, MO · Member since 2019 · 12 posts · 17 votes
    6y
    Originally posted by @Sylvia B.:

    If your rentals are owned by an S corp, you must take a salary from that entity to convert company funds to personal funds. The S corp withholds SS and other taxes from your paycheck. It must file the appropriate forms with various state and federal agencies monthly, quarterly, and annually. It matches the employee portion of the SS tax and also pays federal and state unemployment tax. When the tax returns (both federal and state) are filed (March 15 deadline) the income of the entity is divided among the owners and reported on schedule K-1. From there it goes on the individual's 1040 and is used to calculate self-employment tax. Yes, you owe that 15% on the income of the S corp, even if that income never makes it to your pocket.

    Im a little confused by your description of what happens in an S-Corp. Particularly the part about the owners share, "the income of the entity is divided among the owners and reported on schedule K-1." Do you mean the distributions that go to the shareholders/owners? There are no self-employment taxes payed on that share of the S-Corps money. The 15.3% employment tax, Im calling it that because its the same tax whether half is shared by your employer or you pay it all yourself, is payed only on wages. From a companies perspective that would be 7.65% of all wages paid to any employee, not on the income of the company.

    I never looked into it, though I always assumed that the passive income from rental properties would still count towards your self-employment taxes if I had them in a default taxed LLC. On the other hand, I would think that if it was taxed as an S-Corp the money from any rentals would only count towards employment taxes on wages payed to employees. Whether to shareholder employees or non-shareholder employees.

    UPDATE: 

    "Unlike wages from a job or a business you participate in, rental income isn't considered to be earned income. It's not classified as investment income like capital gains, interest and dividends are. Instead, it's considered to be passive income by the IRS, and therefore is not subject to self-employment tax." Cool beans! 

    Though there is an exception:

    "There are a few exceptions to the self-employment tax rule. If you're a real estate dealer, the IRS considers rental income to be earned income and the income is subject to self-employment tax. You're a real estate dealer if you're in the business of buying and selling real estate with the intent to make a profit."

    There is more to the article if you want to read it...

    https://www.sapling.com/830198...

    0Reply
  • Sylvia B.
    Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Scott Roy:

    Im a little confused by your description of what happens in an S-Corp. Particularly the part about the owners share, "the income of the entity is divided among the owners and reported on schedule K-1." Do you mean the distributions that go to the shareholders/owners? 

    No, I do not mean distributions. Distributions are a withdrawal of equity by the owners, and do not affect the income of the entity. The income of the S Corp belongs to the owners, and affects their personal tax liability, regardless of what distributions are made. That is what I meant by the income of the S Corp possibly never making it to your pocket. 

    The S Corp files a tax return, but unlike a C Corp, does not pay taxes. That income is passed to the owners via the K-1.

    1Reply
  • Ryan Webster
    Member since 2019 · 89 posts · 65 votes
    6y

    @Jesse Richards

    Do not put properties in an s Corp un less your cpa can very plainly tell you why you should. I would definitely get a second opinion from a second cpa. I have in very special cases had my llc's owned by my s corp, but this was to serve a very specific and temporary need. And the properties them selves were still held under llc.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free