S corps and Distributions taxed as capital gains?

Question

I am considering starting a s corperation to own my LLC's that I keep my rental properties in. From what I understand I could pay my self a small management salary of something like $6000-6500 per year, and receive the rest of the income in the form of long term capital gains?

I do almost no work in collecting the rent from my management company, I would think $800 a month would pay me $75 per hour for my "management work".

From what I understand, long term capital gains give you a 0% tax bracket up until $38,000 income, so I would essentially be recieving $32,000 of tax free income if I paid my self a $6000-6500 salary and received the rest as capital gain distributions?

Does the trumps 9000 tax deduction apply to capital gains?

For example, If I paid my self a $550 salary - 15% self employment tax, I would not have to pay federal taxes on the 6000 salary because it is under 9000. Then I would have 32,000 left over as capital gains distributions from the s-corp that had 0 taxes on it? or does the $38,000 tax free rule on capital gains start AFTER the 9000 trump tax deduction?

Meaning I would be able to receive a theoretical 47,000 in capital gains tax free if I had all my income in the form of capital gains? (9000 deduction + 38,000 capital gains tax free rule)

Can someone clarify and tell me if I understand this correctly? I would talk with a accountant right now but I do not have any that I can reach on short notice (or who know what they are talking about, sadly)

Michael Plaks · Answer

@George Leeman

1. You're trying to find a solution for a problem that you do not have. The S-corporation + W2 salary technique is used to reduce self-employment (Soc Security / Medicare) tax. You do not have self-employment tax, to begin with - because rental properties are exempt.

2. Whatever you put your properties into - LLC, S-corp, or nothing at all - will not change the taxation of the income: it is taxed as ordinary income, not capital gains.

3. The income itself (rent) is not taxed. What is taxed is net income: whatever is left after subtracting all expenses and depreciation. You may not have much income, and maybe even zero.

4. There is no Trump's $9,000 tax deduction. It was probably a number from someone's illustration about the new 20% deduction - which may or may not be available to you. Either way, an LLC or an S-corp changes nothing.

5. The S-corp is indeed a bad idea for rentals. The blog post suggested by @Natalie Kolodij lists only one of the drawbacks, and it also has a bad example (the 2-yr move-back strategy described there does not work.) Either way, don't do an S-corp for rentals.

6. You may want to form an LLC or multiple LLCs (or a Series LLC if your properties are in one of the states that allows them, FL does not) - but not for taxes, for legal protection. This is something to discuss with an attorney.

Overall, you're trying to over-complicate your setup, and you're confusing some concepts. I recommend you talk with one of us tax experts, so we can suggest the right structure for your business. You said you don't have any - but there are some 20 of us here on this forum, working nationwide.

Natalie Kolodij · Answer

Oh boy. There are a lot of mis-understood ideas here.

Rental income is passive income, it's not subject to Self Employment tax.  It's not capital gains.

Also you almost NEVER want to keep your rentals in an S corp.

I would recommend finding a great tax pro go review a strategy with- Those of us here on bigger pockets typically know what we're talking about.

- and I'd also start with reading this awesome article from the amazing Amanda Han on why to not put rentals in an S-Corp.

https://www.biggerpockets.com/renewsblog/2016/02/2...

Steven Hamilton II · Answer

Great coverage of the topic!

Chris K. · Answer

@George Leeman

Basically what @Natalie Kolodij and @Michael Plaks said. I would also follow the advice of @Carl Fischer and hire a proper tax advisor to guide you on these questions. Note that unlike lawyers, you can work with CPAs and other tax professionals from any location (demonstrating that I chose the wrong profession). There are many very smart people on BP so I would reach out to them.

Note that there may be some state law considerations in these matters as well. For example, doing what you want to do in PA could be disastrous due to realty transfer tax implications. So you may want to also find a good lawyer in your area to check on these ideas.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Carl Fischer · Answer

@George Leeman

I don’t think rental Income would not be long term capital gains but short term or ordinary income.  Your SE Tax  would  be on salary dividends and rent are basically the same tax results.

Your salary seems fine especially if you want to make Ira or 401 k contributions.

Get the CPAs to help you meet your objectives/goals they have hundreds or thousands of people in similar positions-Don’t reinvent the wheel. Good to think outside the box with the new tax laws. Good luck.

Natalie Kolodij · Answer

Actually- I think @ Steven Hamilton has an office in spring hill. He'd be an excellent person to chat with.

S corps and Distributions taxed as capital gains?

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