What is the most optimal way of establishing a real estate business structure?

I am asking this for purposes of holding property mostly long-term and some short-term. I am also looking for the best way to avoid taxes…not evade. Also, if anyone can recommend any good books to read pertaining to this info, it would be helpful.

I have created an S-corp in Nevada which I plan on using as my main flow-through entity. The properties I purchase which will consist mostly of pre-construction and pre-development real estate to hold for 2 years or greater, which would each be placed under LLC’s in the respective state. A few of those properties throughout the course of the business would also be held short-term(< 1 year). Currently, the S-corp owns 99% of each LLC and I own 1% making the LLC multiple-membered. I am not sure if I should have the S-Corp own 100% of each LLC and make them single-member to avoid paying for multiple tax returns, or even if I should have an S-corp as the master flow through entity instead of an LLC. Properties purchased would be located throughout the nation. Prior to selling, the property would be quitclaimed over to the S-Corp, since there are no state income taxes in Nevada.

An attorney had recommended that I have a Master LLC as the flow through entity, and have that own 100% of each LLC which should be single member owned, so that I would not be paying for multiple tax returns for each partnership between each LLC and myself.(I’m starting to think that the company who set this up for me did it this way in order to get me to pay for more tax return filings) He also mentioned that I would be losing some basis in the property for tax loss purposes. I’m not sure what that means. I understand that S-Corps and LLCs in Nevada don’t have to pay state income taxes. The attorney recommended that I establish the Master LLC in my home state of Louisiana and leave the Nevada corp. alone. I just wanted to get another opinion before giving up all of the time and money I have invested in the Nevada Corp. Your help would be greatly appreciated before I get in too deep doing the wrong thing. Thank you.

The advice for the S-corp owning 99% and my owning 1% of the LLC came from one of the corporation set-up companies in Nevada.

for a newb, your entity structure is unnecessarily burdensome.

this adds to both your hassle cost and financial costs.

if either cost becomes too high, you will abandon your strategy.

With some exceptions (CA) most state taxes aren’t too onerous on entities that have little revenue or income.

Set up a home-state LLC and transact all your business there (don’t own property in your personal name).

If you acquire an “empire” then you can afford to have the structure you outlined…and will know what to do with it.

So what you’re suggesting is to create a master LLC in my home state…and place each LLC for properties in other states under the master? Should those LLC’s be single member?

Or should I just put the few properties that I gradually acquire into my master LLC? And how many properties do I acquire before using the more complex strategy?

Thank you very much for your time.

I’m suggesting you form an LLC in your home state, and begin transacting business inside it. When it owns 3 or 4 properties (or maybe just one multi-family), consider establishing another LLC for additional purchases. When you have 3 or 4 LLC’s with 3 or 4 properties each, then consider a management co.

let your protection strategy grow with your business.

I am assuming that your reasoning for the Nevada corp is that there would be no state income taxes at all with the entity structure you propose.

While Nevada and six other states do not have a personal income tax, just having your NV corp own all the property in your nationwide real estate empire does not relieve you of a state tax liability in the states where the property is located.

As a general rule, income earned from sources within a state are subject to that state’s income tax. If your rental property is located in MD, then MD will tax the rental income earned from within the state even though all the income “flows through” to your NV corp. NV may not tax the income earned in MD, but MD does and you will have to file a MD tax return.

Even if your rental activities in an income tax state result in a net passive loss for the property, you still want to file a state tax return to preserve your entitlement to defer capital gains from state income taxes if you complete a 1031 exchange.

Having a NV S-corp when you are an LA resident does not relieve you from taxes in your own home state, either. The income earned by the S-corp flow through to your personal 1040, where it is taxed at the federal level, AND to your state tax return where it is taxed at the state level.

If state tax avoidance was your only reason for establishing a NV corporation, you may be disappointed after going to the trouble and expense to establish the entity when you do not save any state income taxes at all.

Consult your professional tax advisor for specific details.

To Dave T.
I think I may have been mislead, because my tax advisor encouraged me to do this and used the no state taxes as his selling point. Maybe for the referral fee. I specifically remember him saying I would not be paying my home state income taxes. I should have gotten more than just his opinion. Can I still use the S-corp later or to flip properties so that it doesn’t go to complete waste? I guess I learned the hard way. :banghead

Were you really talking to a tax advisor or were you talking to a saleperson for the company that sold you the program.

sounds like he was talking to an atty…who charges by the word.

here’s a funny:

a guy asks the atty, “how much?”

the atty replies,“$250.”

the guy doesn’t blink, so the atty adds, “per hour.”

the guy still doesn’t blink, so the atty adds, “plus expenses.”

Go ahead…laugh it up. :flush I only wish I would have found this site earlier.

But seriously, is it better to have properties going through an S-corp for short-term holding. I am trying to think of a way to put that corporation to use until I grow further. I would still set up my home state LLC for holdings of greater than a year. Thanks.

You could always just hold it, and sell it as a shelf corp in a couple years…