Real Estate ownership as a corporation offers better liability protection and better tax structures than private ownership but not all corporations are the same. The primary benefit of a corporation is that it separates the owner of corporation from the corporation itself. This means that in the eyes of the law that they are separate people. The owner of a corporation may lose everything that he or she has invested in the corporation, but the remainder of their personal assets (assets not held within the corporation) will not be touched. There are two major ways a corporations can be formed in the USA: C corporations and S corporations :
Owning Real Estate as a C-corporation
All corporations start as C Corporations. C Corporations fully separate the entities from their shareholders (owner.) This however, comes at a price. The downside to owning real estate as a C Corporation is double taxation. If there are employees, the IRS expects employees (including the owner) to be paid at market salaries. Owners of C-corporations must pay corporate tax on profits and then another tax on those profits when they are distributed as dividends. And, as an employee of the company, he must pay himself a market wage. And pay all taxes on that wage. It is not acceptable for the owner to pay him/herself minimum wage and take the rest of the income in the form of a dividend, in an attempt to be taxed as the capital gains rate.
Owning Real Estate as an S Corporation
Owning real estate as an S Corporation is a tax status that is popular with small businesses. It is granted, upon submitting form 2553 to the IRS. It offers a “pass through” feature which means that the the corporation itself does not file a tax return. The profit or loss pass directly through to the shareholder, in proportion to his ownership of the company. If there is a profit the tax is at the personal level of the shareholder, which is often, although not always, lower than the corporate rate. If there is a loss, the shareholder may use it to offset tax owed on other income he may have.
The disadvantage of S-Corporations when it comes to real estate are that they are strict in their requirements. S-corporations must be owned by a citizen or resident of the US, have no more than 100 shareholders, not distribute dividends/losses unevenly amongst shareholders and not have more than one class of stock.
Take the Time to Safeguard Your Assets!
Although your particular circumstances may make one entity standout as right for you, for the most part, real estate investors often find LLCs to be a convenient way of owning real estate, that is safe and tax friendly. Conversely, property, particularly rental property, held in the name of the owner may seem to be a simple solution to ownership. It is also a potential legal and liability hazard. Take the little bit of extra time and cost to make your finances more secure by owning investment property in a legal entity such as a c or s corporation, or a limited liability company. The small extra time and expense is more than made up for by tax benefits and liability protection! Wish to learn more about incorporating visit us here!