All Forum Posts by: Robert Shedden

@Robert Shedden

The LLC holds the property and has corporate shield-asset protection.

S-Corp manages property- owns nothing -and is 2nd line of asset protection behind insurance. 

Tax difference is negligible based on income being from rentals.  State tax may be different based on your state. 

Let your cpa help with your taxes -why re invent the wheel -unless is comes from the new trump tax laws. 

I’m assuming you already have one full time job . Sounds like your trying to give yourself another by overthinking ownership of rentals . It’s meant to be passive income . You will wear yourself out over thinking all of this over one property .

Remember, Keep it simple stupid (not trying to offend )

This scenario is more for when you get to 30 units and are going to retire early on them . When your W2 income stops is when you can really take advantage .

Just some thing to ponder .

@Robert Shedden totally agree with @Richard Sherman and @as@Ashish Acharya. If you are not actively running a business, S-Corp is not going to do you any good. I am not a CPA or attorney but I own a c-Corp, a s-Corp and multiple LLCs.

We get it what you are trying to do. I dont think anyone has done what you have done to save taxes. They might be various other reasons. 

To breakdown:

1) if you had no S-corps:  All your rental income is not subject to self-employment taxes. 

2) if you had S-corp: Part of your rental income are subject to FICA taxes due to salary requirements of the s-corps. 

You will basically be paying extra taxes because of this. 

In addition, the expenses for the LLC is income for the S-corp. These are intercompany transactions in the books of both of the entities and will be eliminated while filing taxes. Thus, there will be no impact what so ever in the final return of the S-corp.

From a legal standpoint, you are subjecting liabilities of property management to Rentals. Hopefully, your lawyer and CPA can shed some more light on this. Goodluck. 

@Robert Shedden, in addition to what @Ashish Acharya explained, you don't want to own rentals in an S-corp. Owning Rentals in an S Corporation Might Be a Costly Mistake: Here’s Why. 

For asset protection reasons, you might want to separate the asset holding entities (passive side & pass-through from taxation POV) from the public facing operations/property management shell entity (the active side & which can be taxed as S-corp if you want to create self-income for other purposes, like being able to establish Solo 401K and roll over other 401K and IRA funds for further investment options).

But for taxes, it's unlikely you'll manage to create any savings - you are just moving money from one pocket to the other - if you work for the LLC, that is an expense for the LLC and income for you, you'll have to report it and pay taxes on it.

Let's say your rentals create 10K in rental income. You do the work without compensation. All 10K passes through to you and gets reported/taxed on your tax return.

Now, let's say you put in the middle the S-corp. You pay yourself 2K for the work you do. Only 8K pass through to you as rental income, but now you have 2K as income (on which you'll have to also pay FICA taxes). Total 10K income, plus some extra taxes.

I think you are mixing several concepts together without an understanding on how things work. Here is a diagram to help you on this quest (although it's more from asset protection perspective):

@Robert Shedden Listen to @Ashish Acharya and go talk to your attorney (that's the short answer.)

Longer answer...get ready, this is going to get rough :)  

Disclosure: I am NOT an attorney...I AM a business owner with TWO C-Corps, 1 LLC with S Corp Election, 4 operational property LLCs each with about 3 million in real estate in them and 1 "master" LLC that owns those property LLCs that is a partnership SPECIFICALLY so I could get all that flipping revenue off my personal tax return and into a K1...so I appreciate and respect your brain hustle in thinking about this stuff!

1. You are overthinking it. There is ZERO reason to pay for anything LLC, Series LLC, Land Trust, S Corp, C corp, WuTang-Corp etc on your 1st or even your 3rd property...unless they are BIG properties (like over a million.) Just put it in your name and get a GOOD umbrella insurance policy and thank me later.

2. You are 150% wrong on the way taxes work (I told you this would get rough) accountants can jump in and correct me, but it goes a little something like this....in your scenario your LLC has an expense for paying you (as an employee of your S Corp) for work. LLC has a deduction (lowers your tax under the LLC as it lowers your net profit) BUT it RAISES the taxes for you and your S corp as that is income you now have to claim. The reason people take distributions from companies instead of paying it all out on W2 income is that your COMPANY is liable for half of FICA and you are liable for the other on W2 income, but on distributions, it does not apply...HOWEVER the IRS mandates that you are paid a reasonable salary before you can take distributions....because they know the game since they WROTE the rules ;)

3. With the additional filing fees and registration fees and bank accounts etc you have ALSO just created either a more complex tax return or possibly a K1 from a corp tax return, neither of which you want.

TL/DR - Spend the time and effort finding deals and closing them and just get an umbrella policy for now, when you have several properties and your accountants start talking about wanting an LLC then go that route.

@Robert Shedden , 

This does not give you are the result what you are expecting because you, like most of the people, are missing the basic concept of taxation.

 You are saying since you are taking a distribution from S-corp thus, there is no taxable income. That is a flawed understanding. Distribution and net -income are two different concepts.  You can have 100k of net rental income in the S-corp that is driven from all the LLCs rentals, and you can take out entire 100k as distribution, but you will still pay taxes on the 100k of the rental income. Taking our distribution does not shelter your taxes. When you take a distribution of the already taxed rental income, then you dont pay taxes. That is why distribution is not taxed because you already paid the taxes on the income that generated your distribution. If you had no rental income, there would be no cash for distribution. 

Since S-corp will own all the LLCs, the net rental income will be reported in the S-corp tax return. You will owe the same amount of tax in both the cases (holding Rentals in LLCs or holding those LLC in the S-corp). All the income will flow through the LLC to S-corp to you.

Rob, I think the only person you should get advice from on this is from your Tax Accountant and your Attorney.  Not knowing your long-term strategies or tolerance for risk, I think you have to be careful about anyone giving you specific advice on something so important and so personal to your situation.

That's just my personal opinion.  There's simply too much at stake if you get this wrong...