As real estate tax consultants, one of the top questions we get from real estate clients is “What business entity is best for real estate investment?”
From your tax rate to profit-sharing, it’s common knowledge that the business entity you choose can have significant effects on your taxes, liabilities, and estate planning.
The truth is, different business entities are right for different types of real estate investors. Below, we’ve broken down our entity suggestions according to short and long term real estate investments.
LLC or S-Corp–What’s best for Real Estate Investment?
Short Term Investments
If you’re a short term real estate investor, such as a house flipper, an S-Corporation is most likely the best business entity for you. That’s because S-Corps are better for “buy and sell” investors because:
- Profits and losses are treated as ordinary income and loss
- You can avoid self-employment tax on a portion of the profit earned from flipping real estate
Long Term Investments
If you have long term real estate investments, like a rental property, a single member or multi-member LLC (Limited Liability Company) is most likely the best business entity for you. That’s because LLCs offer great long term benefits, like
- Decreased liability for property owners
- When separate LLCs are created for each property, if someone files a lawsuit pertaining to one of your properties, the rest of your properties are not affected
- Owners can pay less in taxes, as both single member and multi-member LLCs get the benefits of pass-through taxation (income made by the LLC will flow through to your individual income tax return)
If the property you own is in another state, it’s best practice form your LLC in the state in which your property is located. That way, you can legal standing in that state and prevent from being taxed by the state your property’s in and your home state.
Short and Long Term Investments
What if you flip some real estate while holding onto other real estate for the long term? If you happen to be one of those real estate investors who does both, it’s best you separate your real estate investments into two different entities as discussed above: an S Corp for short term investments and an LLC for your long term investments.
Have More Questions on Real Estate Investment? Give Us A Call!
Robert Hall & Associates has assisted Glendale, Burbank, and Pasadena real estate investors implement the best incorporation and tax strategies to enhance the value of their investments and real estate holdings since 1971.