General Partnership: Formation, Advantages and Disadvantages

Many people want to go into business with a partner. This has many advantages over working alone. You have someone to carry you through struggles, and someone to turn to for decision-making. There’s also the fact though that you have someone who is interfering with the decisions that you would like to make. This can be hard to handle, but can be worth it. In the following we show you what a general partnership is, its advantages, how it is formed, and much more.

Definition and Basics: What does a General Partnership Mean?

The official definition, according to the state of California is “a form of business entity in which two or more co-owners engage in business for profit”. In practice it means two individuals share liability, profits, and losses from real estate investments. Important: this form of doing business is unincorporated, meaning that it is not separate from the people doing the business. It also has, by definition, more than one owner.

• A form of business entity in which two or more co-owners engage in business for profit

Forming a General Partnership: Business Name, Licenses, Agreements, etc.

In forming a general partnership, the first step is to choose a business name for the partnership. This is important, as you need to make sure that the name is not taken by another company or partnership. To do this you search your local district’s registry, the state secretary’s and so it does not infringe on a trademark or service mark the United States Patent and Trademark Office and the Register of Trademarks and Service Marks. Next, you draft and sign a well-written partnership agreement.

Next, back to the secretary of state, where you file a statement of general partnership. Many people skip this, as it is not obligatory, and you can avoid the $70 filing fee and the $15 fee. In the same step, you register the name of the partnership at the local level by obtaining a fictitious business name. Next you must set up a separate bank account for your partnership. You should try to keep your personal finances separate from your business finances. Finally you obtain the local business licenses and specialty real estate licenses (these differ between states).

Process summarized:

1. Choose a Name
2. Create a Partnership Agreement
3. File Statement of General Partnership and Register Name
4. Open a Partnership Account
5. Obtain Permits and Licenses

Documents:

• Partnership Agreement
• Statement of General Partnership

Advantages: Filing Fees, Stress and Flexibility

The first advantage is not the most significant, but perhaps important for partnershiips with limited time and finances (we do not recommend this). A general partnership is not as legally binding as other forms of business entities, and therefore is not necessary to be filed at the state level. Therefore you can skip the filing fee and hassle with the secretary of state. It is also in general a less stressful form of business, as there is less bureaucracy and it is less legally protected. Lastly, the biggest advantage of a general partnership is that it is very easy to convert to an LLC. This makes it a great stepping stone for those not ready for the total commitment of an LLC.

• No filing fee
• Less stressful
• Flexible to convert

Disadvantages: Structure, Liability and Disagreements

The main reason most people form a business is to avoid liability. This is unfortunately not the case for general partnerships which are not subject to liability protection, as they are not entities separate from their owners. An additional problem comes from the fact that general partnerships are often formed between two individuals who already know each other. Even when this is not the case, a common problem, as there are only two people in the partnership, is that owners disagree. This can lead to conflict and far-reaching issues. The lack of structure is another and the final disadvantage of general partnerships

• No liability protection
• Owners can disagree
• Lack of Structure

Real Estate General Partnership: Advice, Tips for Real Estate Partnerships

Different from other types of ownerships like C corporations or S corporations, a general partnership is considered the original partnership, and is also the least complicated. There are still a few details to keep in mind. Including how to structure a real estate partnership (whether limited or general), and the utmost importance of a partnership agreement. Lastly, we also answer the common question, if general partners are a necessary part of a partnership.

1. Structuring a Real Estate Partnership
2. Partnership Agreement
3. Does every partnership need a general partner?

Structuring a Real Estate Partnership

The structure of a real estate partnership can be a complicated thing. It is important to take your time with planning this, and making every step of it as perfect as possible. To avoid mistakes, get a primer on how to structure your partnership with the video below.

Partnership Agreement – Most Important Part of a General Partnership

When investors in a general partenrship buy a property, each general partner has an equal right to participate in the management and control of it. From a practical perspective, this means that determining how disagreements that arise in the ordinary course of business will be handled is of paramount importance. The partnership is free to designate a different method of decision-making and provide for it in writing either in the partnership agreement and/or an amendment thereto. In the partnership you will detail how decisions are made, how votes are made, and if you need e.g. a majority or unanimous vote.

The partnership agreement is make or break!

Does Every Partnership Need a Partner?

Yes. Every partnership, including limited partnerships, and limited liability partnerships (not to be confused with limited liability company), need at least one general partner. This is the person that makes day-to-day decisions, and takes the brunt of liability. They also make all legally binding decisions, as it is them who are liable for any legal consequences.

• Yes, every partnership needs at least one general partner who makes day-to-day decisions

Taxes: Pass-Through Structure

There are a few benefits to taxes in tthe world of general partnerships. Firstly, general partnerships, unlike corporations, do not pay income taxes. We go in-depth on the details you need to know, below.

1. Are Partnerships Tax Exempt?
2. Do all Partners pay the Same Amount of Taxes?

Are Partnerships Tax Exempt? Tax Structure of General Partnerships

Yes. General partnerships are tax exempt. The business itself does not pay any income taxes. Rather, the general partners pay income taxes. In other words, profits, losses, etc. all pass through to the partners directly.

• No, all income and losses pass through directly to partners and are taxed as their incoome tax

Distribution – Do all Partners Pay the Same Amount of Taxes?

This can be decided by partners. Otherwise, the IRS taxes every partner equally. This can be advantageous, e.g. if you are an existing partner and a new partner joins, in which case the amount of tax reduces. If you are made a partner though, then you become owner of the partnership’s assets, and also liable for taxes.

• Partners decide whether everyone pays the same amount

General Partnership – The Original Partnership

The general partnership is the classic, the original type of partnership. It is attractive often mostly for beginners or those who are not yet certain that they will enter an LLC or the direction their business will take. It has many advantages though, and is a good decision for many who choose it.

Comparison: What is the Difference between a General Partnership and Limited Partnership

The difference between a general partnership and a limited partnership is that a general partnership consists only of general partners, all of whom carry liability. Limited partnership has additional partners who are not liable (so-called limited partners). General partnerships and limited partnerships are often misconstrued, due to the important difference between a partner and partnership. A limited partnership also has general partners.

• Limited partnerships are general partnerships with additional partners who do not carry liability (limited partners)
• General partnerships consist only of general partners

See Limited Partnerships – Real Estate

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REIT: Formation, Advantages and Disadvantages

For a more grand style of investment. It is possible to have a trust which manages real estate investments, in which many shareholders invest much capital. These are the wall street version of a real estate holding, and are connected with massive sums of capital.

Definition and Basics: Real Estate Trust Fund

A REIT is first and foremost a Real-Estate-Investment-Trust. At first glance, a REIT seems very similar to a real estate corporation. It is a company which operates or owns real estate. These are typically income-producing, such as hotels, infrastructure, or warehouse. That means the majority of its economy comes from income, as opposed to in the form of sales or appreciation. REITs are also usually not diversified. A REIT which specializes in timber, will own much land, but very little e.g. office spaces.

• Real Estate Investment Trust – Publicly traded companies

Forming a REIT: Big Real Estate Company

If you wanto to form a REIT you must first establish a partnership agreement. Typically REITs are originally management companies, thanks to the requirement of 100 investors. Next you decide in which state you will form your REIT, and contact this state’s secretary. Next, the private placement memorandum (also called offering memorandum) details important information about the REIT, e.g. properties which it intends to invest in, and information about board directors. Now you start searching for investors, by offering your prospectus which informs them of your strategies, structure, etc. Once the magic number of 100 is reached, you can filed for articles of incorproation. Finally, you file Form 1120 with the IRS, and you’re done!

Process summarized:

1. Establish partnership agreement
2. Decide on location
3. Contact secretary of state
4. Write a private placement memorandum
5. Investor search using prospectus
6. File for articles of incorporation and Form 1120

Documents:

• Private Placement Memorandum (a.k.a. Offering Memorandum)
• Prospectus
• Form 1120

Advantages: Low Risk, Diversification and Flexibility

Investors can profit from investments which they would usually not be capable of making. These can be massive infrastructure projects which an everyday person typically does not have the money to invest in, but in cooperation with many others can contribute. Additionally, they are able to diversify their investment within the real estate market, because they hold an interest in multiple properties with minimal dollars. There is also lower risk associated with REIT investing. Another certain advantage is the fact that investors can sell their shares quickly. Another advantage, if you are a foreign national in the USA, is that, although you would not qualify to invest in traditional real estate, you can through a REIT.

• Profit from investments which would otherwise be impossible
• Diversified investments
• Lower risk
• Sell shares quickly
• Not barred if foreign

Disadvantages: Slow, Taxation and Loss of Control

Some disadvantages were mentioned earlier. The main disadvantage is that REITs are typically not subject to large growth because they cannot reinvest their income. They are forced to return 90% of the earnings to the investors meaning only 10% of the earnings can be reinvested in the company. Additionally, while most dividends are only taxed at 15%, REIT dividends are taxed as regular income. This is a much higher rate. There is also the drawback that REIT investors do not have control over operational decisions, meaning they can be helpless against ineffective changes. Lastly, some REITs (but not all, do your research!) incur exorbitant management and transaction fees. This logically leads to lower distributions of incomme to shareholders, and therefore reduced income for the investors.

• Slow growth
• Dividends highly taxed
• No control over operational decisions
• High management & transaction fees

Real Estate REIT: Requirements, Profit

If you want to get in on the REIT business, there’s a few things to keep in mind. If you own property, or want to buy and sell properties, a REIT will not be for you. It is a more likely choice when you have surplus capital which you want to invest in a slow-growing and safe trust.

Are REITs Publicly Traded?

Yes! This makes the fundamental difference between other LLCs or e.g. limited partnerships. They are publicly traded, and therefore you can invest in REITs as you would in other trusts or stocks. In a sense they are stocks where you invest in real estate managers.

• Yes, REITs are publicly traded

Can I Start my own REIT? Requirements

Yes! Although it is not easy. There are a few important things to keep in mind. First, before becoming a REIT, most companies are LLCs, which once finding enough investors, file to become a REIT. These requirements are not asked to be present in the first year of a REITs operation, but usually by the second.

• REITs have multiple requirements
• Most REITs begin as LLCs

How Many Investors in a REIT?

The first important requirement is that you must have at least 100 investors. For most people it is difficult to find this. Especially when having little real estate experience, it is hard to find this many investors willing to take the risk.

• At least 100

Pay-Out for REITs – Over 90% of Profit

REITs must, by law, be structured such that at least 90% of profits must be distributed to investors as dividends, every single year. This is a law, and therefore, once not doing this, a REIT will forfeit its status as such and no longer qualify for the additional benefits of being a REIT.

• REITs must distribute at least 90% of profits to investors

What does a REIT Invest in?

Another law from the IRS: you must also invest at least 75 percent of a REITs value/assets in a form of real estate. This is usually not a problem, with the majority of REITs having over 90% of their assets invested in real estate. A REIT must also derive at least 95 percent of its gross income from real estate investments.

• REITs must invest at least 75% of their assets in real estate

Can you Become Rich with REITs? – Profit, Investment Dividends

Most people will not become rich with REITs. They are slow to throw dividends, yet for that reason usually very safe. It is unlikely to e.g. double your investment. Yet, in the long run, the vast majority of REITs have outperformed most stocks, meaning that they are a safer investment. Although there are some mega-REITs which have shown massive increases in value, and great profit for their investors, these are not get-rich-quick stocks.

• REITs are a safe but slow-growing investment

Invest in Real Estate or REITs? How to Choose

If you’re struggling to decide whether to invest in a REIT or in real life real estate? Take a look below, as this video explains everything you need to know about REITs and real estate:

Can an LLC be a REIT? Differences and Similarities

First and foremost, REITs are taxed as corporations. In practice, this means that most management companies intending to become a REIT will begin their life as an LLC. Once this LLC has grown to be large enough, it will file to become a REIT.

Taxes: Few Advantages

If you want tax deductions, REITs probably won’t be for you. Compared with traditional real estate investing, where tax write-offs are near-infinite, including depreciation, mortgage, interest, etc., REITs are not as priveliged.

1. REIT dividends Taxation
2. Depreciation Expenses

Normal Income – REIT Dividends

At least 90% of income which the REIT generates must be passed on to investors. This is taxed according to each individual investor’s marginal tax rate. In other words, the income which an investor makes from REITs is taxed as any other income would be.

• Dividends are taxed as normal income by investors

Depreciation Expenses – REIT Tax Advantage

Depreciation expenses can reduce the amount of income received. REIT investors can minimize their taxes by writing off this depreciation on the dividends they receive.

• You can write off depreciation for REITs

REIT Summary: Big-Time, Slow-Time

REITs certainly have a good reason to exist. They offer a unique opportunity to invest in the massive and seemingly unbeatable real estate market, without having to shell out the millions, or taking up a mortgage. With less risk comes less reward though, and this type of investment is not likely to pay off quickly or heavily. It is a small and constant pay-off. This can be attractive or not depending on what you prefer!

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C Corporation: Formation, Advantages and Disadvantages

A C corporation, also called c corp, is, in contrast to the similar s corp, a true corporation. That means that some tax advantages dissapate, while some other advantages become apparent. Follow along to understand why, and in what cases the c corp can be the right decision for you.

Definition and Basics: C Corp as a True Corporation

A C corp is a taxable entity that acts as a corporation. Any real estate or objects it owns will also be in the name of the corporation, and any increase in value, e.g. through appreciation, will be taxed as a corporation.

• C Corporation = Taxable corporation

Forming a C Corp: How to, Steps, Documents

To form a C corp the first step is to choose where you want to file. Three main things to look out for: Filing fees (Nevada is most expensive, Hawaii, Colorado and Arkansas cheapest), the laws and bylaws, and whether your name is taken. Then you must gather your board of directors, with whom you will then file the articles fo incorporation with the state. Watch out though! This does not mean your corporation is formed, this is merely informing the state that you intend to form a corporation. Next you will decide with the board of directors how things work, who does what, and what is allowed or not allowed (i.e. formalizing the bylaws and finding an operating agreement). After this is done, it is put into writing, and passed on to the state.

Process summarized:

1. Choose a Location (e.g. Hawaii or Colorado)
2. Find Board of Directors
3. File Articles of Incorporation
4. Operating Agreement
5. Final Certification

Documents:

• Operating Agreement
• Statement of Corporate Form/Management Structure

Advantages: Raising Capital and Liability

A C corp is a good way to overcome many of the issues of S corporations. For one, you have an improved ability to raise capital, because the structure makes bringing on investors much easier and more convenient. Additionally, there is, as with all forms of real estate entities, liability protection, meaning it is the corporation, not the individual behind it being liable. Lastly, a major advantage is that C corps are self-sustaining in a sense. Most business structures cease to exist once owners or investors leave. This is not the case for C corps though, which remain despite the owner leaving the company.

• Easier to Raise Capital
• Liability Protection
• Self-Sustaining

Disadvantages: Double Taxation, Regulations and Fees

Now, despite all its advantages, there are significant drawbacks. These have lead to many people proclaiming that no one should ever hold their real estate in a C corp, but this is of course not true. The biggest disadvantage is of course the double taxation. Many people seek a real estate entity to avoid exactly this double taxation. E.g. a limited partnership allows for investors to tax their profits only once, which is not the case for a C corp. Additionally, C corps have a lot of regulations which they must adhere to. That means a lot of paperwork for accountants or owners. Lastly, C corps can incur large costs to be formed as well as for upkeep.

• Double Taxation
• Lots of Regulations = Lots of Paperwork
• Large Fees for Incorporation and Upkeep

Investing in real estate and want to save on your taxes?

Real Estate Tax Deductions

Real Estate C Corporation: Big Investments

For investing in real estate in a grand style, C corporations are just the thing. Now it is important to keep in mind the legalities behind actual c corporations and s corporations and what they mean.

What is the Difference Between an S Corp and C Corp?

In reality, there is no true difference. Even S corps are C corps, just that they have filed a different IRS form. An S Corporation is also called a Sub-S, and is a C Corporation that has filed Form 2553 and elected to be treated as described in Subchapter S of the Code. Of course you can always choose to go with multiple entities, which can give you advantages of each form of business.

S corporations = C corporations with Sub-S status

Terminology Confusion and Legalities – Investment Misunderstood

It should be mentioned that no matter what, every corporation which is created is a C corporation. There is no way around it. That means, by default, you are going to be forming a C corporation. It is only possible afterwards to file for an S corp election. This then takes the corporation to a Sub-S status.

How can C Corporations Avoid Double Taxation? Saving Real Estate Taxes

Everybody wants to pay less real estate taxes. Especially when you are paying taxes on income that is already taxed, which real estate investment often incurs. So, how is it possible to avoid the biggest disadvantage of C corps, double taxation? Let us explain. First, why this is a disadvantage, then the legal surroundings of converting to an S corp, how to convert to an s corp, and how long this process takes. Lastly, to get a lay of the land how much you’re paying, the full tax rates in US states for C corporations.

1. Why is Double Taxation a Disadvantage for Corporations?
2. Can I convert my C corp to an S Corp?
3. How to Convert a C Corp into an S Corp
4. How Long does it Take to Become an S Corp?
5. How much are Taxes for a C Corp?

Why is Double Taxation a Disadvantage for Corporations?

In itself, the legal structure making double taxation possible is not a problem. Wanting profits from your real estate investment makes a problem. In fact, a corporation not being a pass-through entity like LLCs or s corps has many advantages. It is for these reasons that people choose the C corp. Double taxation is only a disadvantage when an investor, owner, or member, wants to receive money from the corporation. In the case of an S corp, this is declared as personal income, once. In a C corp, it is taxed once going into the company, and once going into your pocket

• Only a problem when withdrawing money

Avoid Double Taxation: Can I convert my C corp to an S Corp?

Taxes when buying real estate are already confusing and at times costly. As mentioned above, using a C corp means likely being subject to double taxation. Yet it’s possible to convert your C corp into an S corp, avoiding this problem. Some shareholders of C corporations never took advantage of the opportunity to convert and therefore remain subject to double taxation. Since the Tax Act of 1986, personal tax rates were reduced, making it possible to convert C corporations into S corporations. Because S corps have a more convenient tax structure, this would avoid the issue of double taxation.

• Yes, Since 1986 you can convert C corporations to S corporations

How to Convert a C Corp into an S Corp – Real Estate Investment

A possible solution to possibly avoid double taxation upon liquidation of property in a C Corporation is to convert the C Corporation into an S Corporation. To become an S Corporation, a C Corporation must file IRS Form 2553 with the IRS. This form must be signed by all shareholders, which means that each shareholder has veto power over the conversion from a C Corporation to an S Corporation. IRS approval of Form 2553 is routine (not discretionary) as long as the corporation meets the formal requirements for conversion.

• Use IRS Form 2553
• Get approval from all shareholders

How Long does it Take to Become an S Corp?

This depends on if you are an existing corporation or a new corporation. New businesses must file for an S corp election within 2,5 months of creation. For existing businesses, it is 2,5 months before the beginning of the respective tax year. Yet in total, for the governing body to approve a new corporation, it takes four to six weeks.

• 2,5 months or 2 months and 15 days
• Four to six weeks after filing

C Corp Tax Rates – How much are Taxes for a C Corp?

Considering double taxation, it is also important to look at the general tax rates for the C corp. This has important influence on the salary that investors or owners will receive. These have been set in the same form since a reform by the IRS in 2010. Take a look below, comparing income in USD to the tax rate for the investor.

• $0 – $50.000: 15%
• $50.000 – $75.000: $7.500 + 25%
• $75.000 – $100.000: $13.750 + 34%
• $100.000 – $335.000: $22.250 + 39%
• $335.000 – $10.000.000: $113.900 + 34%
• $10.000.000 – $15.000.000: $3.400.000 + 35%
• $15.000.000 – $18.333.333: $5.150.000 + 38%
• $18.333.333: 35%

C Corp Summary: For Big Investments

C corp is maybe a bit like the next step for many corporations. It is for more investors, and with greater possibilities. That doesn’t keep it from its own disadvantages though, as can be seen in the double taxation issue.

Comparison: S Corp or C Corp?

That’s the question. To find out, read our in-depth article on S corps. It should tell you everything you could need to know about whether to choose an S corp or C corp to reduce liability for your real estate business.

See Real Estate S Corporation

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Multiple Entities: Formation, Advantages and Disadvantages

So you want to improve your real estate investments by forming not only one, but multiple entities? This is a smart move, as you shouldn’t have very different investments in the same corporation. If you do short-term investments (e.g. flipping), as well as long-term investments (e.g. rentals), you should handle these with separate entities.

Definition and Basics: Multiple Entities

The definition is just that. If you are member of multiple entities, you are e.g. part of an LLC as well as a limited partnership, or at the same time a single-member LLC and an s-corporation.

• Different entities for different needs

Forming Multiple Entities: What to Remember

There are in fact very few conflicts between owning multiple entities. That means, you are not incurring additional work when you have more than one entitiy. The only issue may be that you need to keep them apart. To find out how to form each type of entity, check out the links below.

Forming an LLC

To form an LLC is a relatively simple process. Our article gives the whole explanation and detailed step-by-step guide about what you need to remember when forming an LLC.

LLC – Real Estate

Forming a Limited Partnership

A limited partnership is also among the most popular forms of real estate entities. You are likely to find significant safety and savings when using this form. Only thing to be aware of, that you get along with your partners! Learn more:#

Limited Partnership – Real Estate

Forming an S Corporation

Sometimes criticized, but this form of corporation is still a handy one to have in the back pocket. Especially for short term investments, this form gives you safety and tax savings. S corporations are great if you already have an LLC for long term investments, but are realizing that your short term investment ideas aren’t well-serviced by this form. Get an additional S corporation! Learn more:

S Corporation for Real Estate

Real Estate Entities: Many Entities, Many Advantages

With multiple entities you have more freedom, as you’re not limited to the disadvantages of one form of corporation.

Multiple LLCs: How Many LLCs for my Properties?

There’s the possibility of choosingg multiple LLCs for different properties. This makes sense when you consider the reason for using an LLC. It is to prevent liability. If your LLC owns many properties, you may not be liable, but damages can be incurred on all properties. That means, that while you may not lose your money, you will lose all your investments.

Multiple LLCs = Less Liability

Do you need a Separate LLC for each Rental Property?

No. It is of course not a bad idea, especially if you’re mostly focused on avoiding liability. On the other hand, if you own many properties, this increasing amount fo LLC can become annoying, and not worth it. In short, you don’t need it, but unless you have too many properties, you should have it.

• No, but you probably should

How to Combine Real Estate Entities

With so many different types of entities, and then on top of that, so many ways to form each entity, you may be stuck in a room with too many doors. No worries though, there is one typical form that will likely fit your needs. It is the combination of a Delaware LLC with an S corporation (or an LLC taxed as an S corporation). The Delaware LLC, thanks to its tax advantages, is well suited to long-term investments. Meanwhile, with an S corporation you are well-suited to take on short-term investments, which are better handled with this form of corporation.

• Delaware LLC + S Corporation

Multiple Entities Summary: Best of All Worlds

With multiple entities, you are most likely to be able to make the right choice. No matter what investment you are making, you will likely find a good fit within either your LLC or limited partnership or the S corporation.

• Mulitple Entities, multiple options
• More likely to save money

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S Corporation: Formation, Advantages and Disadvantages

The S Corporation is typically for short term investors. Its form can typically be found in investors who prefer to flip house, rather than the more longterm investment options such as the limited partnership. It is handy to know that this form exists, and its advantages and disadvantages. Even you may find that this type of company can be quite handy in reducing your liability and increasing profit.

Definition and Basics: S Corporation

S corporations, also shortened to S corp, are corporations. These include a certain amount of shareholders, to whom profits, losses, etc. are passed on to. That means instead of the company being the owner of the profits, it is directly passed through to all shareholders. This typically means less tax on income for everyone.

Can an S Corporation Own Real Estate?

Yes, and in fact, real estate investors who often find themselves selling real estate are most advantaged by an S corporation (or an LLC taxed like an S corporation).

• Best for selling real estate

Forming a S Corporation: How to Change Status

This makes it clear what an S corporation is. The question is now how to become such a corporation. Before starting this process, make sure you qualify, as detailed by the IRS.

Requirements for Becoming an S Corporation – Regulations

According the IRS, to qualify for forming an S Corporation you must first fulfill these requirements:

• Not be an international corporation
• Shareholders must be allowable (can be individuals, certain trusts, and estates but not partnerships, corporations or non-resident alien shareholders
• Fewer or equal to 100 shareholders
• Limited to one class of stock
• Not be a financial institutions, insurance companies, or domestic international sales corporations

Easy Process – All Steps to Becoming an S Corporation

To change the status of your corporation to an S corporation, you just need to fulfill the requirements, and fill in the form 2553 from the IRS. It must then be signed by all shareholders (as well as their spouses potentially). If it is a new corporation,it has two and a half months after inception to file for S corporation status. Otherwise, they will stay in the C subchapter.

Process summarized:

1. Form 2553 from IRS
2. Signed by all members
3. Filed in time

Documents:

• Form 2553 – IRS

Advantages: Installments, Tax Deductions and Depreciation

The seller of a piece of real estate can avoid self-employment/social security tax on a part of the amount which he or she is making thanks to the sale of real estate. Other advantages include the fact that S corporations avoid double-taxation, protect shareholders liability, reduce self-employment taxes and (under certain conditions) allow for contribution of appreciated property to the S corporation without recognizing a gain. As with most real estate entities, an S corporation will also protect shareholders from liabilities.

• Installment sale method of recognizing gains
• Capital gains tax rate
• Tax-free exchange of property
• Depreciation deductions

Disadvantages: Deducting Losses, Limits and Stock Classes

S corporation are controversial in the world of real estate. These are the reasons: You may not be saving as you think. Some shareholders in S corporations cannot deduct the losses of the corporation from their income statement. That means the protection which the investor hopes to achieve will be lost. There is also of course the limit on the number of shareholders which can be off putting for larger or growing corporations. Additionally, the other restrictions, of shareholders (i.e. citizens of US), and of the type of stock are also disadvantages.

• Cannot deduct losses
• Limit on number of shareholders
• Shareholders must be US Citizens
• Only one class of stock

Real Estate S Corporation: Profiting with Flipping

The most popular application of s corporations is for flipping. This means that people who buy and renovate houses in a short period of time are well served. That is because, often flips are subject to heavy taxes, and very few tax deductions. S corporations can counter this issue.

Flipping – Must be Done with an S Corporation

As mentioned above, the S corporation is well-suited for “real estate flipping.” When properties are flipped, they are considered inventory and the investor is considered a “dealer.” A real estate dealer who is not working under an S corporation is misses out on these advantages of the s corporation.

Why is an S Corporation best for Flipping?

You can save on self-employmetn tax (15,3% of your income). This is distinct from your income tax. If you profit 100000, as an LLC, you will hvae to pay both income and self-employment tax, which you, of course, would like to avoid.

Taxes: S Corporation

Of course, again, the biggest advantage of S corporations is that you can avoid the self-employment taxes which you otherwise have to pay as a real estate investor.

1. Self-Employment Taxes
2. How to Save Taxes with S Corporations

Biggest Tax Savings with S Corporations – Self Employment Taxes

When you become an S corp you immediately mitigate your self-employment taxes. This happens because, when you become an S corp you can split your income from the dividends you make. The dividends are not subject to self-employment taxes. Your salary still is of course, but this is less.

Want to save more on real estate taxes

• Real Estate Tax Deductions

How to Save Taxes with S Corporations

To understand fully how these tax advantages function, take a look at this video below. It explains the possibilities you have to save the most with an S corporation.

Example S Corporation – Explained

Let’s say John and Jane form an S corporation. They share ownership equally at 50/50. Jane contributes $950.000 in cash. John on the other hand, contributes $950.000 worth of real estate that is encumbered by a $850.000 mortgage, with the original amount being $600.000. The mortgage is now taken into the S corporation. That means that John is free of debt, in fact, the mortgage is higher than his cost in the property, so theoretically, he will make a gain of $250.000. Also note, that this contribution is tax-free. Now this may be unfair, or undesirable, but it is one of the facets of S corporations.

S Corporation Summary: Avoid Self-Employment Taxes

There are many advantages to S corporations, but also disadvantages. The most important thing is to get informed beforehand about what the best type of entity is for you and your purposes. If you intend to flip a house, it is almost certain that an S corporation is the route you will want to take.

Comparison: S Corporation or LLC?

S corporations are often compared with the ubiquitous LLC. They differ heavily, and provide different advantages. To compare read our article

• Real Estate LLCs

Der Beitrag S Corporation: Real Estate, Forming, Advantages / Disadvantages & Taxes erschien zuerst auf ℄ Real Estates.