I have read that by default an LLC is taxed the same as a sole proprietorship, which can be taxed at 15%. The article mentioned to declare that the LLC be taxed as a C Corporation (apparently by filing an IRS Form 8832) when setting up the LLC.
My question is: How would this be a benefit? Is there a significant tax break by doing this? How common is the practice in the real estate arena?
You need to read the complete article you are alluding to.
A single member LLC can be treated for tax purposes as either a disregarded entity (a sole proprietorship) or as a corporation. If the LLC opts to be treated as a corporation, the default is a C-Corp unless a separate election is also made to convert the C-Corp to an S-Corp.
A multiple member LLC can be treated for tax purposes as either a partnership or as a corporation.
If the LLC fails to make a tax treatment election, the default is a disregarded entity (sole proprietorship) for the single member LLC, and a partnership for the multiple member LLC.
The tax rate for the disregarded entity (sole proprietorship) is the taxpayer’s marginal tax bracket, whatever that may be, up to 39.1%. The 15% tax rate only applies to the sole proprietorship as long as the taxpayer’s taxable income keeps him in the 15% tax bracket.
The most appropriate entity structure for you depends upon many factors other than tax treatment. Your need for asset protection and limitation of liability are two prominent factors that should enter the decision process when you are discussing your options with your CPA, your tax advisor, and your estate planner.