Author Topic: S-corp or LLC for real estate investment  (Read 6554 times)

Weedy Acres

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S-corp or LLC for real estate investment
« on: April 01, 2015, 05:00:51 PM »
I own a business, and am looking to buy or build a building.  Advisors say have a separate entity own the real estate and lease it to the business, as this makes it easier down the road when you sell, because you can sell biz and real estate individually. 

So I went to legalzoom and ordered (I thought) an LLC formation package.  Got the paperwork back today and I must have clicked the "corporation" button, because it came back with Inc on the name instead of LLC.  Do I need to rework this to be an LLC?  Or will everything be ok if I'm an S-corp.  I've read a bunch of articles online, and I can't find any good answers.

Joshua

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Re: S-corp or LLC for real estate investment
« Reply #1 on: April 01, 2015, 05:31:15 PM »
So... your willing to spend the money to buy or build a building for your business, but not the $400 to have a lawyer answer your questions and draw up the necessary paperwork?

SaintM

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Re: S-corp or LLC for real estate investment
« Reply #2 on: April 01, 2015, 05:46:34 PM »
LLC requires self-employment taxes on all net income.  S-corp doesn't necessarily.

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #3 on: April 01, 2015, 05:49:31 PM »
You need to consult legal advice.

It very much depends.

I'd use one for rentals, and a different one for flips.  I'd rather not say which is which, as my advice/situation may not be yours.

I agree with Joshua:
So... your willing to spend the money to buy or build a building for your business, but not the $400 to have a lawyer answer your questions and draw up the necessary paperwork?

The LegalZoom money you spent is a sunk cost ... now go talk to a lawyer.

:)
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jwright

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Re: S-corp or LLC for real estate investment
« Reply #4 on: April 03, 2015, 10:06:25 AM »
I own a business, and am looking to buy or build a building.  Advisors say have a separate entity own the real estate and lease it to the business, as this makes it easier down the road when you sell, because you can sell biz and real estate individually. 

So I went to legalzoom and ordered (I thought) an LLC formation package.  Got the paperwork back today and I must have clicked the "corporation" button, because it came back with Inc on the name instead of LLC.  Do I need to rework this to be an LLC?  Or will everything be ok if I'm an S-corp.  I've read a bunch of articles online, and I can't find any good answers.

I would never keep property held for investment in an S-Corp.  The mortgage on the property wouldn't give you debt basis to deduct losses, and if you need to get the property out of a Corp you are in for a world of hurt.


jwright

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Re: S-corp or LLC for real estate investment
« Reply #5 on: April 03, 2015, 10:07:30 AM »
LLC requires self-employment taxes on all net income.  S-corp doesn't necessarily.

There are MANY situations in which an LLC would not require self-employment tax.  Rental income is usually one.

math-ya

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Re: S-corp or LLC for real estate investment
« Reply #6 on: April 03, 2015, 02:33:53 PM »
id try to get your cash back from legal zoom. but in my state making an llc is simple. you just go to the states llc webpage, and if the name is available, pay $125 right there and its yours. maybe your state has a similar setup. i hate paying lawyers for stuff i can do myself.

Edog

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Re: S-corp or LLC for real estate investment
« Reply #7 on: April 11, 2015, 12:10:45 AM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #8 on: April 11, 2015, 07:58:21 AM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

What is the connection between being a CPA and saying real estate should be in an LLC?  It's a passthrough entity, so taxes shouldn't be affected.

So is an LLC being necessary your personal opinion?  If so, why mention the CPA thing?

If it is your professional opinion, why?  Please elaborate.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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East River Guide

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Re: S-corp or LLC for real estate investment
« Reply #9 on: April 11, 2015, 01:09:12 PM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

taxes shouldn't be affected.


Not true.  jwright had good points above.

SaintM

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Re: S-corp or LLC for real estate investment
« Reply #10 on: April 11, 2015, 03:21:20 PM »
These are state specific issues that really cannot be definitively addressed here.

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #11 on: April 11, 2015, 03:30:18 PM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

taxes shouldn't be affected.


Not true.  jwright had good points above.

Huh?  I reread his posts and saw nothing that addressed what I was talking about.

I will stick with what I said: A property held in an LLC or one held in one's own name shouldn't be treated different, tax-wise.

This is to the best of my understanding. 

If you say that's "not true"--back it up with examples or more information.  How so is that wrong?  I'd love to know more, but I don't think I'm wrong.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Cpa Cat

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Re: S-corp or LLC for real estate investment
« Reply #12 on: April 11, 2015, 03:37:29 PM »
You should start with your state's Secretary of State website. Depending on the state, the Secretary of State can sometimes have some really great information to help guide you.

And frankly, many of the forms are incredibly easy to fill out.

East River Guide

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Re: S-corp or LLC for real estate investment
« Reply #13 on: April 11, 2015, 06:21:58 PM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

taxes shouldn't be affected.


Not true.  jwright had good points above.

Huh?  I reread his posts and saw nothing that addressed what I was talking about.


Hmm, maybe what you were talking about wasn't what he was asking about.  The question as I read it was S corp or LLC.  To wit, your earlier comment referred to using one or the other,  not neither.   In the context  of choosing between the two types of entities, the go with the LLC advice was sound.  From a legal point of view there are good reasons to put it in an entity and that was assumed in his question.  From there there are tax reasons why an LLC is better. 

But to the OP it is still a good idea to get real advice where someone can consider all your specifics and not rely on generic internet opinions.
« Last Edit: April 11, 2015, 06:52:28 PM by East River Guide »

Cpa Cat

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Re: S-corp or LLC for real estate investment
« Reply #14 on: April 11, 2015, 06:59:22 PM »
Just to be clear: An S-Corp and an LLC are not mutually exclusive.

An LLC's default tax classification is as a disregarded entity for single-owner or partnership if more than one owner. An LLC can elect to be taxed as a corporation (default C-Corp) and then file paperwork to elect to become an S-Corp. In other words, an LLC could be any for-profit tax classification.

A corporation can only be a corporation for tax purposes (default C-Corp, elect to be an S-Corp, could also be a nonprofit).

Putting real-estate in an LLC and then renting it to your business will give you separation that is desirable from a legal standpoint, but whether it has a tax advantage or disadvantage is dependent on your situation.

If your building has a rental profit and you have other rental properties that are generating passive losses that you can't deduct currently, then it's a bonus.

If your building has a rental loss, then you've basically just converted an ordinary business expense into a passive loss. You could have reduced self-employment taxes and ordinary income tax with those expenses.

But wait, you say - if both are under my control, why shouldn't I just have my business pay enough rent to my building LLC to ensure a reduction in self-employment taxes on my business side and plenty of passive activity gain available for deducting passive activity losses! Yay!

Because if you rent your building out for something above the Fair Market Value, the IRS will probably audit you. And then reclassify your income. And make you pay back taxes. Yay.

Point being - An LLC is a legal organization structure - not a tax structure.

For tax purposes, there is no difference between an LLC that elects to be taxed as an S-Corp and a corporation that elects to be taxed as an S-Corp. For legal purposes, there may be a difference - which depends entirely on your state.

« Last Edit: April 11, 2015, 07:01:31 PM by Cpa Cat »

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #15 on: April 11, 2015, 07:12:15 PM »
I'm a cpa don't risk this.  All real estate needs to be in a LLC.

taxes shouldn't be affected.


Not true.  jwright had good points above.

Huh?  I reread his posts and saw nothing that addressed what I was talking about.


Hmm, maybe what you were talking about wasn't what he was asking about.  The question as I read it was S corp or LLC.  To wit, your earlier comment referred to using one or the other,  not neither.   In the context  of choosing between the two types of entities, the go with the LLC advice was sound.  From a legal point of view there are good reasons to put it in an entity and that was assumed in his question.  From there there are tax reasons why an LLC is better. 

But to the OP it is still a good idea to get real advice where someone can consider all your specifics and not rely on generic internet opinions.

Ah.  I was talking about his general statement.  I don't think all real estate needs to be in an LLC.  I don't think even all real estate that's held in an entity needs to be in an LLC.  Like I said, there's some I'd have taxed as a corp, depending on the purpose, length of holding time, etc.

Definitely consult your professional advisor(s).  But the blanket statement "i'm a cpa, all real estate goes in an llc" is way overly broad, and--frankly--wrong, IMO.

And thanks for the clarifications CPA Cat.  It is an important thing to note that you can elect how your entity is taxed, and the ensuing ramifications.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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TheGrimSqueaker

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Re: S-corp or LLC for real estate investment
« Reply #16 on: April 14, 2015, 10:02:50 PM »
I'll never own real estate through a LLC again.  I've spent about 15 years doing that, while simultaneously owning and renting out different kinds of real estate in a personal capacity.  I have the following insights based on personal experience.

1) When obtaining financing, as a private owner of a 4-plex or less I qualify for a residential loan as opposed to a commercial loan.  Through a LLC it's got to be a commercial loan at a substantially higher rate of interest.  It's possible to get a duplex or 4-plex that's cash flow positive, IF you can get favorable loan terms.  But that's next to impossible as a LLC.

2) A LLC limits the liability of the company to the assets of that company, but that's mostly on paper.  You are fully liable, in a personal capacity, for any actual criminal conduct (including criminal negligence) that you engage in through the LLC.  If someone sues you, they come after you in a personal capacity as well.  If someone slips on the ice, or has an emergency hangnail on your property, they can and will sue you.  It's not hard to find out who owns a LLC.  If someone is serious about getting money out of your LLC, they can and will go after the owners.  There are tort prosecutors who consider this normal behavior.

3) Many states don't allow single-owner LLC's.  Do you really want a partner or two?  If so, how will you handle the eventual misalignment of interests that naturally occur between two or more individuals over the course of a decade?  (Think very carefully about this; it's like getting married but without the sex or the emotional attachment).

4) Depending on who you bank with, many lenders won't lend to an LLC, but will lend to the shareholders in a personal capacity.  The corporate veil gets shredded.

5) A LLC is a pass-through with respect to taxes.  You don't get any depreciation or other tax advantages not available to you in a personal capacity.  But you generally have to wait for an accountant to draw up your K-1 at the end of the tax year.  Many accountants are so freaking late that you have to file for an extension.  If you're halfway responsible and owe Uncle Sam at the end of every year as all good Mustachians are supposed to, you have to file anyway and THEN file an amended return.  It's a horrific pain in the ass.  Don't sign yourself up for that unless you have a fetish for IRS paperwork.

6) If you are "not in the real estate business" and make most of your money elsewhere, you are exempt from some of the excessively Politically Correct laws that might otherwise cramp your style.  For example, if you ever elect to also rent out a room in your home, it's far better in my opinion to use Schedule E instead of Schedule C.

7) There are no deductions available through a LLC that are not equally available through Schedule E.  You can even have a 1031 exchange.  However the LLC structure itself imposes some overhead especially at start-up.

8) Should you, as the LLC, divest yourself of a property using the quitclaim-and-refinance method to postpone the taxes due on recovered depreciation which would otherwise occur in the event of a sale, the person acquiring the property must "season" the property for six months to a year by having title to it INSTEAD of the LLC, while the LLC (and possibly you in a personal capacity) are still on the hook for the mortgage.  Does that sound like fun to you: being jointly and severally liable for a mortgage, in a personal capacity, without also having title to the asset backing the mortgage?  (Hint: No, it should not, unless you enjoy sticking your hand down a garbage disposal and turning it on).

So far as I can see, unless you've got a situation that absolutely requires a partnership, the up-sides to a LLC in no way outweigh the down sides in the specific area of investment real estate.  I've been there and done that, and I'm NEVER doing it again. I, and I alone, will hold title to my properties in a personal capacity.  For liability purposes, there's a product called umbrella insurance that is FAR cheaper than the expenses associated with LLC and partner related bullshit.

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #17 on: April 14, 2015, 10:08:42 PM »
And while I would again advise someone to talk to their lawyer, and not listen to randoms  on the Internet, I will say that Grim makes lots of good points, IMO.

And definitely get the umbrella whether you have the LLC or not (and by definitely, I mean consult your advisor. But get it. ;) )
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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jwright

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Re: S-corp or LLC for real estate investment
« Reply #18 on: April 15, 2015, 08:28:36 AM »
Wasn't the question S-Corp or LLC?  I stand firm on my advise to not choose S-Corp for holding real estate.  LLC versus sole proprietorship in your name is not a question that most of us are arguing about.

arebelspy

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Re: S-corp or LLC for real estate investment
« Reply #19 on: April 15, 2015, 09:43:10 AM »
Wasn't the question S-Corp or LLC?  I stand firm on my advise to not choose S-Corp for holding real estate.  LLC versus sole proprietorship in your name is not a question that most of us are arguing about.

It's still a relevant point.  If the question is LLC vs. S-Corp, and you're saying LLC > S-Corp, but someone else points out that nothing > LLC, that's important to know.

In any case, I'll stick with my "it depends" -- I've seen situations where it was better to be taxed as an S-Corp for real estate investment purposes (specifically flips).

Consult your professional, because it really does depend, however hard you stick to your answer.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

theoverlook

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Re: S-corp or LLC for real estate investment
« Reply #20 on: April 16, 2015, 09:21:02 AM »
(Hint: No, it should not, unless you enjoy sticking your hand down a garbage disposal and turning it on).

I'm convinced!