A real estate corporation needs to provide legal liability protection while giving tax advantages to the investment business and owner. It's the type of entity wealthy
real estate investors use to structure their business and shield personal assets
from business losses, lawsuits and double taxation.
Yes, a C corporation, S corporation,
and Limited Liability Corporation (LLC) can buy and hold real estate
investments. And all have different strengths and weaknesses when it
comes to asset protection and taxes. The best solution is a multi-layer
real estate corporation structure tailored to your specific investment strategies.
A C corporation that is taxed as an S corporation for the business and create Limited Liability Company (LLC) for each real estate investment with the C corporation in control.
Establishes instant credibility for a new business
Transfer ownership of the corporation or raise capital with the sale of stock
Unlimited life- Corporations continue even after the owner's death
Tax deductible expenses: travel, insurance, and qualified retirement plans
Taxes for capital gains will be higher when selling or transferring real estate in a C corporation. However, a LLC that holds real
estate will pay the lease amount of taxes. Plus, if the real estate is
refinanced later, you'll appreciate the LLC even more.
Many investors like to have their real estate corporation pay rent to their LLC for office space. The rent paid to the LLC is a tax deduction for the business C corporation and the income to the LLC is neutralized by operating costs and depreciation.
Pro tip: Depending on your investment goals, you can also avoid the capital gain taxes with the use of a 1031 exchange but that is another set of rules with different pros and cons.
Eliminate double taxation. A C corporation which is taxed as S corporation allows the profit or loss from the business to pass through to the shareholders to be taxed at their personal income tax amount using a K-1. When established in this manner double taxation will be eliminated. Plus, the income is not subject to unemployment, FICA, workers compensation, or other employment-related expenses.
If the shareholder (you) is also an employee of the real estate corporation your salary is treated as a tax deductible expense for your business.
Tight Asset Protection. Place each real estate investment in a Limited Liability Company (LLC) with your investment business C corporation in control. It needs to be structured in these ways because if you are sued personally, a judgment creditor may be able to pierce the corporate veil of an C or S corporation, take your shares and control the business corporation and all of it's assets, including real estate investments.
Yes. Shareholders own the real estate corporation. If you are the only owner then you own 100% of the shares. However, if you have partners then they own a percentage based on the amount of shares they are assigned or hold.
Rehabbing And Flipping Properties
Since many people will be at the property working it sky rockets your liability. Hold your real estate investment company in a C corporation and each of the properties you flip use an LLC. The C corporation will protect your company by keeping it separate from your properties but retains complete control. If a lawsuit occurs, then only the one LLC is sued instead of your whole company and every property it holds.
The tax liability of Self-employment (SE) taxes will be eliminated.
Pro tip: If you flip properties in your own name, the IRS sees you as a dealer. Real estate investors never want to be in this position because it increases the taxes outrageously, and you can't take depreciation on the property, or installment sales.
Rental Property Buy And Hold
C corporations offer wide range of tax benefits, including depreciation and Cost segregation. Liability for rental property is high and tight asset protection is needed with the property in the LLC and the C corporation controlling it. Nevada, Wyoming, or Delaware, are the best states to form your C corporation in but you will want to form your LLC in the state where the property is located.
C corporations are used to control a Trust which holds the property. These types of trusts are commonly referred to as, land trusts or wholesale trusts. The trust enters into the contract with the property owner. Then you assign the trust - not the contract to your buyer. The name on the contract remains the same and all non-assignment contract issues are eliminated. This structure will also give you the best asset protection from lawsuits.
Pro tip: Have one bank account and set of books for your real estate corporation but keep each LLC or Trust's expenses and income separately recorded.