Real estate investing requires that you consider your entity selection in order to both benefit from the tax code and protect your assets from unnecessary liability.
CPA Patrick Camuso takes us through the considerations and benefits of an LLC versus a S Corporation.
Operating as a sole proprietor leaves you exposed for liability that an entity can shield your from.
In order to determine which entity option is best for you, it is recommended that you start with a clear understanding of your real estate investing strategy.
Real Estate Investing Questions & Answers
The first question you need to answer is will you be passive or active. If your goal is to buy and hold, and you turn over all of the day to day investment and property management decisions are handled by others, your are passive. An LLC is a good option for a passive investor
If you will be operating a more hands or, “active”, business that flips, or includes a lot of transactions, you are likely a good candidate for an S Corp. Especially when your income increases beyond $60,000 per year from your real estate investing. There are additional tax codes that you can benefit from when you are filed as an S Corp.
An S Corp does expose you to self employment tax. Working with your CPA to determine what a reasonable compensation is, you can limit the amount of your income that is applicable to self employment tax. Additional compensation can be received as distributions that are not subject to self employment tax.
The S Corp comes with additional accounting costs. You will need to weigh the cost of accounting against the tax benefits if your operation to determine when is the right time to file as an S Corp.
Additionally, if you create multiple entities, remember to maintain the corporate veil and keep separate accounting and accounts for all income and expenses.
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