What Entity Structure Should I Have For A Rental Property?

Aug 17, 2022

Real estate is tricky and is usually treated much different than a typical business. This is just one Blog Post and Podcast Episode in an entire guide we put together on real estate taxes.

If you have not checked out our other content around real estate taxes, do so now by visiting: The Ultimate Guide to Real Estate Taxes

Here we are going to be talking about entity structure when it comes to rental properties. Before we get started, this is not legal advice and simply based on my experiences and what we see clients do.

What Do I Need To Know About Entity Structures for Real Estate?

Just off the bat, I want to say that you should always consult an attorney when it comes to entities, as they can advise on the legal side. Here we are going to be talking about the tax side of it.

Now, I want to be clear, very rarely will using an entity for your rental property create tax savings but using the wrong entity could create some tax issues.

Traditionally we see clients use an LLC (that is separate from any operating business) for their rental properties. As an attorney can talk to you about, the reason for an LLC typically is meant for liability purposes (not necessarily tax saving purposes).

I also want to be clear that if you are ultra wealthy we may dig deeper on asset protection strategies with your attorney, but for the normal rental property investor we see clients typically utilizing an LLC.

Should I Use An S Corp for Rental Properties?

The main advantage of using an S Corp is to avoid self employment taxes. However, with a rental property it is not subject to self employment taxes.

Therefore we would rarely use an S Corp for a rental property but we would generally use one for the following real estate activities, if your income was above $50k or so per year:

  • Real Estate Agents (Realtors) or Brokers
  • Developers
  • Fix and Flipper

Basically any real estate activity that would be subject to self employment tax, that is when we would start to look at S Corp being a great option.

Should I Setup My Own Management Company?

Generally stating, it does not make sense to setup your own management company for your rental properties. The reason is, when you have a management company that income is now subject to self employment taxes, where typical rental properties are not because they are considered passive income. So why bring on the potential of self employment income?

There are a few reasons where a management company may make sense.

  • You are looking to take advantage of: retirement plan funding, high medical costs, etc. using rental property income.
    • With just rental income you can not use that to fund a retirement account but if you have a management company you can utilize that income from that to fund a retirement account.

With that being said, if you are managing other properties that you do not own then we may want to revisit this.

Should I Rent My Building to My Business?

Generally stating we would recommend that if you are a business owner and own the building that your business operates out of, that you setup an LLC separately for the property. As an attorney can let you know, this is generally for asset protection.

Basically you would have an entity for your business and then an entity for your property and you would rent the property to your business.

You should want to have a lease agreement in place for this and have proof of a reasonable rental rate. There are some self-rental rules that we discuss in our Tax Minimization Program that you also just want to be sure to think about.

Entity Structure Summary

In general, everything we talked about today is something that should also be discussed with an attorney to ensure you have the proper setup. Depending on your income and specific situation this will look completely different for everyone. There is a lot of asset protection items in play when we start to talk about entity structures.

With that being said for just your everyday average rental property owner we have some general statements but again you should consult a professional to go through your specifics.

  • Use an LLC for a rental property
  • Do not use an S Corp for a rental property
  • Use an S Corp (if your income is high enough) for: Real Estate Agents/Brokers, Developers, Fix and Flippers, etc.
  • Traditionally setting up your own management company does not make sense unless you are looking to fund retirement, have high medical costs, etc.
  • If you have a building that you use for your business, set it up in a separate LLC and rent it to your business.

Again, these are all general statements and not legal advice, be sure to contact your advisors.

As a reminder, this is just one Blog Post and Podcast Episode in an entire guide we put together on real estate taxes.

If you have not checked out our other content around real estate taxes, do so now by visiting: The Ultimate Guide to Real Estate Taxes

We also have a full section in our Tax Minimization Program specific to strategies around rental properties!

 

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