Is it better to own investment RE via a corp, or as a person?

I won a house at a real estate auction. I can buy it either with
personal money, or with money in my corporation's account. The intent
is to either rent it out or resell, I have not decided.
My question is, from a tax standpoint, is it better to own it through
a S corp, or personally?
Reply to
Igor Chudov
To reduce liability, you should own it in an LLC or a corporation. LLC is easier to manage for compliance, and a corporation may offer more tax advantages with higher cash flow; might depend on whether your income is considered active or passive. I have several properties all owned under LLCs. Good luck.
Reply to
Bernarr Pardo
Bernarr, I already have an S corp. It is called Algebra, Inc,
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I would own the house through that one if I decide to go corporate route. Would it be harder to sell the house, though?
Reply to
Igor Chudov
I NEVER advise a client to own an appreciating asset, typically real estate, inside a corporation of ANY kind, not even an S Corp.
C corporations do not get the benefit of special long term capital gain tax rates. Renting the house will reduce your basis because of depreciation. Selling the house will (at least we HOPE) result in a gain, if for no other reason than simply because of the depreciation recapture rules. So if a C Corp sells a house it will pay tax at regular C Corp tax rates.
Why not an S Corp, it is a pass through and any gain will pass through to the stockholders and THEY get long term capital gain rates right? Technically yes, today, with the current rules we have, and assuming the IRS never challenges your S election. Unfortunately, I've seen more a few S Corps get their S elections revoked because they failed to play by the rules - usually this is accidental, but sometimes its deliberate. Either way, if the IRS rejects your S election the house is stuck in a C corp. and generally higher tax rates apply.
I am not a lawyer so I am not giving you legal advice - you need to also be aware that should the corp. (c or s, doesn't matter) gets sued then all the assets of the corp. are at risk. Hence, it may not be advisable to put all your eggs in one basket. This is why the big players set up multiple companies to conduct business - multiple companies create multiple layers of shielding to help protect assets in the event of a suit. And it matters not a whit whether its the S corp. business or the rental that results in the suit, all the corp. assets would still be at risk.
Rentals are considered passive activities and no self employment tax is due on any of the annual profit BUT ONLY if it is held personally or in a pass-through entity, like an LLC or S Corp. If you do go the S corp. route you must report the rental on a separatea form as an attachment to the 1120S - similar to using a Schedule E as part of your 1040. If you set up a single member LLC and owned the house either alone or with your spouse, you will still be a disregarded entity but you'd report it on Schedule E as part of your personal return.
Holding the rental in an S Corp means that its still a passive activity but that does NOT necessarily relieve you of the requirement to tax payroll as an employee, so you're still on the hook for payroll taxes -which can be avoided by using an LLC or Schedule E.
Lastly, REMOVING a rental from an S Corp - say you want to live there personally or simply want to shut down the corporation for whatever reason - means you have treat the distribution AS IF it was sold to you at full fair market value. This is part of the Deemed Sales Rules. This generates phantom income at the corp. level which you have to pay tax on even though there is no actual cash with which to pay the tax.
You really should see a local tax pro with experience in rental properties before you make a decision that will cost you more to unwind than it would cost to get help and do it right from the beginning.
Good luck, Gene E. Utterback, EA, RFC, ABA
Reply to
Gene E. Utterback, EA, RFC, AB
If you own real estate in a C Corp, is self employemnt tax due?
isn't this contrary to the above paragraph?
Reply to
Pico Rico
There is NO self employment for C Corporations. Instead you take a salary, subject to FICA taxes.
Not at all.
Corporations, both S & C, are required to pay their employees - INCLUDING the owners who perform services for the corp, including the management of rentals - a SALARY. This salary is subject to FICA taxes. So while the rental activity itself would be passive, by holding it in a corp of any kind essentially converts at least some of the income to ordinary income, subject to a tax that would NOT apply if you held the rental differently.
Alternatively, LLC members and Schedule E operators are NOT ALLOWED to take a salary. Instead, LLC members may need to take Guaranteed Payments which are subject to Self Employment tax. HOWEVER, if the ONLY item in the LLC is a rental then it would stay a passive activity and SE tax would not apply. Schedule E operators also pay no SE tax.
Gene E. Utterback, EA, RFC, ABA
Reply to
Gene E. Utterback, EA, RFC, AB

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