It is important to understand that an S Corporation should not be used as an entity for buy-and-hold rental real estate. The reason you select to be taxed as an S Corporation is to reduce and control the amount of self-employment taxes on the business net profits. Rental real estate is not subject to self-employment taxes. By placing rental real estate in an S Corporation, you are voluntarily subjecting yourself to pay self-employment taxes through the “reasonable wage” you are required to pay as the shareholder of the business (see “Reasonable Compensation” blog).
If you are looking for asset protection, most real estate investors own real estate in a single-member LLC. Simplicity of reporting is a major benefit for the single-owner LLC structure, as you would report the rental income and rental expense activity on your personal tax return on Schedule E.
If you have a multi-member LLC that owns real estate, you would be required to file a partnership tax return Form 1065. This is used when the two members are not related to one another. Spouses do not both need to be members of an LLC, since the assets are owned jointly on a married filing joint tax return.
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
