S-Corp or C-Corp.. Which is better for real estate?

California… Well the title about says it all. I’m trying to decide between the two.

My CPA says ‘S’, but at Learning Annex they said go with ‘C’ to claim a wider range of deductions. Anyone with experience on this care to fill me in? Thanks,

depends on what you are going to do? there is no “one size fits all” answer.

irrespective, go with an LLC and simply tax it as a partnership, C-corp or S-corp. superior asset protection plus the tax strategy you need.

I thought the only difference between C and S is the number of shareholders you’re allowed. S has a limit of 75. C is unlimited. Now a LLC taxed as a S-corp is different. I don’t know much about it.

corporate stock is considered an investment. as such, it is available to satisfy judgement creditors in the event you are sued and lose. so when you rear-end the lady in the Pinto, it explodes, her kids sue you personally and win, they can gain ownership of the company that owns the property.

LLC membership, on the other hand, is considered personal property by statute. As such it is not available to satisfy judgement creditors. Now when they sue they may get a judgement and charging order, but they cannot gain ownership or control of the company that owns the property, putting you in a much better position.

both the corporation and LLC protect you from liabilities arising within the entity, but only the LLC protects the company from your personal liabilities.

LLC all the way.

In addition, corporations, including S, come with much more hassle: annual meetings, resolutions, etc.

there are MANY differences between C and S. Handling of taxes (S is passthru) shareholder benefits, etc. An LLC taxed as one of these types IS a corporation to the IRS and must follow all the same rules…and received all the same benefits.

You can have the LLC taxed as a C-corp or S-corp thus gaining the superior asset protection of the LLC along with whatever tax strategy benefits you most.

there are MANY differences between C and S.

well said…

I heard something about LLCs are best for rentals, but for flips S-corp is the best way to go because of the tax flow. I guess if you flip more than 2 properties a year it’s considered your trade and you get taxed like a regular job, Mwagner you know anything about that?

yeah, I know a little something. Whoever told you that obviously doesn’t know what they’re talking about.

They are comparing apples and mcintosh apples. If the LLC is taxed as an S-corp there is NO difference between them. What you have to compare are the taxing methods: sole proprietor, partnership, C-corp and S-corp, then apply whichever one is best for you to the LLC.

re-read my last post. you WANT an LLC. Period.

Now, how you want to tax it will vary depending on your business, financial position and strategy. Taxing the LLC as an S-corp may be best for flips, or it may not.

Flips will always be ordinary business income, subject to income tax as well as SE tax. That’s a lot of tax. For this reason, most recommend that you tax as an S-corp which allows you to take a distribution of income free of SE, IF you pay yourself a reasonable salary. Payments when personal services are rendered to the S-corp will be considered salary first, subject to SE. Only after you satisfy the reasonableness of compensation will you be allowed to take a distribution free of SE. Therefore, this only works if a) the LLC makes enough to pay you a reasonable salary b) the LLC makes enough more to pay you a distribution and c) you want/need to take the cash out of the company. If you can’t meet these 3 tests, or you want to leave the cash in the company for future deals, you might be better off taxing as a C-corp (generally lower tax rate) and switching to S-corp when the company makes more $$.

So, you see there is no “one size fits all” answer. It depends on your personal circumstances. WHICH is why you need a financial advisor on your team who knows how things really work, not what the book says.

I should quit giving this stuff away…

How long of a period do you have to wait in order to switch from a C to an S?

Rather than just guessing, let’s look at the tax code.

Section 453 tells us that the term “dealer disposition” means any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business.

Flip property, by default, is property held for sale to customers in the ordinary course of the taxpayer’s trade or business. Therefore, the word ANY in this definition tells us that you are engaged in a dealer disposition even if you only flip ONE property during the year.

If you are looking for some magic number of flips you can do before you are a dealer, the number is ONE.

you can convert from C to S at any time, but there is no “one size fits all” answer here, either.

For example, if as a C-corp you incur a loss, it carries forward to next year and offsets future income. You would not want to covert to S-corp at this point because the loss would be unavailable to offset future years’ income since the future S income would pass through to your personal 1040 while the C loss would not. You need to wait until the company has profits to “get back to zero” before you convert. Conversely, if the company has profits, but you expect to begin incurring losses, you may want to convert in order to take the S-corp loss against other personal income, rather than carrying it forward.

Once you switch, though, switching back is complicated so make sure it’s the correct decision.

So flipping from a C to an S is only advisable once rather than 2 or 3+ ?times? what makes once less complicated than 2+ times?


“I should quit giving this stuff away…”
I have posted here before asking somewhat similar questions and have received great replies from you. I appreciate you patience and thoughtful answers. Please keep giving this stuff away - it benefits all of us. Thanks again!!


I believe I read somewhere (perhaps in one of Mark’s posts) that once you convert, you can’t do it again for another five years. If this is the case, then you have to interpret Mark’s advice to mean that you must make sure that the conversion is the best tax treatement for your projected business activity for the next five tax years.

If I have it wrong, I am prepared to stand corrected.

that’s correct. plus, converting from C to S and back creates headaches with tracking the various types of income in the company, what’s been taxed, what can be distributed, what’s a dividend, etc.

it’s a real pain.

I just wanted to say thank you for your contribution, Mark. I appreciate it greatly.

A handful of clarifying points about S corporations…

  1. The essential feature of an S corporation is that the S corporation doesn’t pay income taxes on its profits… rather, the profits are allocated to shareholders who then pay income tax on their respective shares.

  2. As a practical matter, business owners (but not usually long-term real estate investors) like an S corporation for another reason. In a sole proprietorship or partnership and also in a small C corporation that extracts all of the profits in the form of shareholder salaries, the profits are subject both to income taxes and also to self-employment taxes (same thing as social security and medicare taxes). With an S corporation, only that portion of the profit that’s categorized as shareholder-employee compensation is subject to employment taxes. (NOTE: Presidential hopeful John Edwards, as reported during last election, saved about $800K in payroll taxes by running his law firm as an S corporation and categorizing only the first $400K of his $26.5M profit as “Wages.”)

  3. S corporations have some restrictions concerning their ownership. You’re sort of limited to 100 shareholders (although families often get counted as one shareholder). You can only have US citizens or permanent residents as shareholders (or other entities that are very close to these entities–such as grantor trusts, bankruptcy estates, testamentary trusts and so on).

I do think you want to confer with a local tax practitioner about this rather than winging, when you’re talking about real estate.

Also, as a general rule, you would not want to ever put real estate inside a C corp… and you would not want to convert a C corp with real estate to an S corp because of something called the built-in gains tax (which is one of the few times that an S corp does pay tax)… and also because of some other little wrinkles

So, under an S Corp could you have NO payroll and keep all the money in the S Corp account and buy and sell real estate through that account, and use it tax free? Say, use this to build up cash reserves and maybe 3 years down, pay yourself a one time payroll, or something similar.

Also, how do you not get all your properties at risk through an S Corp? How do you individually protect each property using this method.

What is the difference between an LLC and LLP?


With an S corp, you do have to pay yourself a reasonable salary.

No. All S-corp income passes through to the shareholders’ 1040 where it is taxed at their marginal rate every year. In this case, buying and selling real estate constitutes a trade or business in which you actively participate. Thus, the income would further be subject to Self Employment tax UNLESS you paid yourself a reasonable salary.

Personal service to an S-corp is always considered employment by the IRS. (They don’t let people use S-corp to avoid Fica/Medi) Only if the facts and circumstances indicate that you’ve already paid this burden will they allow you to take additional distributions free of SE (but still taxed as passthru income)

You and I have an S-corp buying and selling real estate and we’re 50/50. You work 60 hours a week and I work zero having nothing to do with the business (I’m just the money man). My portion of the S-corp income is passive and not subject to SE. You are not passive and pay SE. However, if you receive a $60k salary from the S-corp, that payroll is already taxed for FICA/Medi. Then the S-corp income that passes through to you will not be subject to SE.

Note that if the business is rentals, this is passive income and stays passive as it passes through to your 1040 and is never subject to SE irrespective of your participation.

You don’t risk your properties in an S-corp by not having an S-corp. Use a non-corporate entity and tax it as an S-corp.

So even in an LLC if you leave all the income/profit in the LLC’s account you still have to pay income and SE taxes?

any good books on this stuff for a beginner?

edit - when setting up your llc how do you make sure you set it up so it can be taxed as an s corp.

thanks again.