Should You Put Real Estate In an S Corp? - YouTube

Yo what's going on everybody? My name is Ryan,  I am a CPA, and today I'm going to be talking  

about whether or not you should be putting your  real estate investment properties into an S  

corporation. And before I do that I would love  it if you would please smash the like button,  

and you'll see, if you'll find this video helpful,  and if you do, smash like button. If you're new  

here please do consider subscribing to my channel  I'd really appreciate that. I'm putting out a lot  

of content you know, free content on tax related  matters, business related matters, and you know,  

the government's CARES Act, all the programs  that are available right now to help businesses  

and individuals. So before we continue I want  to address why you would even want to consider  

putting things in an S-Corp okay. So as an  S-corporation, well actually as a business owner,  

you usually pay self-employment tax and income tax  on your income okay. So self-employment tax is 15%  

which is pretty significant and then you add that  to income tax which could range from 10% to 39%  

for federal and then you know, whatever your state  is as well. So it could get pretty high up there  

right. So people, when you have a, when you  own an S Corporation you actually eliminate  

your self-employment tax altogether, the 15%. The  problem is as an S Corp owner you are required to  

pay yourself a reasonable salary. So your business  has to pay you a W-2 wage and that's where the IRS  

gets to collect their self-employment  tax, through the payroll taxes. But in  

the end it's still more beneficial typically for  business owners to operate as an S Corporation.  

As long as it's like a small business and a  closely held group. Now what does that mean? A  

closely held group means it's maybe one, maybe two  owners and that's it, that's how it works best.  

You know, and if the business doesn't intend on  getting funding through investors that's another  

good reason to not do an S Corp. Because you know  the S Corp ownership are limited to just people,  

and they have to be domestic, here in the US.  That means that businesses can't own shares  

in an S Corp and it also means that foreign  people can't own shares in the S Corp. So  

S-Corps are really limited. They're for like  very small businesses you know, individual owners  

only, maybe a husband and wife owner is  recommended. I would not recommend it for every  

business. I wouldn't just blanketly say you should  do an S Corp. It really depends on your business,  

on who's the ownership, structure, and what the  ownership structure looks like, and if you intend  

on getting investors and all that stuff. So in  this video we're going to assume if we recommend  

to put it in an S Corp, we're going to assume that  all those things, all those conditions are okay,  

and you're okay with uh you know,  not being able to get investors.  

You're okay with just being the sole owner of  the S Corp or whatever it is. We're going to  

assume all those conditions are met. So that's  why we're talking about this with real estate.  

We get questions a lot on whether or not you  should be putting real estate in an S Corp. So  

before we start also, I want to go over the  different types of real estate investments.  

First there are long term rentals which you  know, you have like a residential property,  

you lease that for a year to like one tenant, and  that's a long term rental. Then you have short  

term rentals which are more like Airbnb's, like  typical Airbnb's where you have like a vacation  

home or something in the city, and people just  come and rent it out for a week, maybe a few days,  

something like that. That is a short-term rental.  Then you have bed and breakfasts which are kind of  

like Airbnb's but you also provide substantial  services and I'll talk about that later. And  

then I'm going to talk about fix and flips which  basically means you buy property, you fix it up,  

and then you resell it at a higher price or  you just buy property, and then resell at a  

higher price. In terms of real estate, I want to  consider also wholesaling but I will you know,  

just lump that in with fix and flips okay.  Because they're different I understand but  

tax treatment is similar. All right so to  start with long-term rentals. Should you  

put long-term rentals in an S-Corp? And I  would say the answer is no you shouldn't  

because long-term rentals do not generate  self-employment tax. Long-term rentals just  

are rental income, they're passive income so you  don't have to worry about the self-employment tax  

issue. Therefore if you were to put it in an S  Corp or an LLC, or not put into any entity at all  

it makes zero difference on your, on your taxes  except how you file them. You know but you won't  

be paying less taxes doing it one way compared  to the other. Now why wouldn't you want to  

put it in an S Corp anyway? Well if you can put  it in an LLC I think LLC's are better legally  

for businesses. Like there's fewer corporate  formalities that you have to follow, there's  

just fewer regulations you have to follow. LLC's  are just better. So that's why I would put it in  

an LLC if there's no self-employment issue. Now if  you put it in a corporation like an S corporation  

then you actually are at a disadvantage compared  to an LLC. So what's the disadvantage? Have you  

heard of the step up in basis when you pass away  or when you inherit a property? Well when it's in  

the LLC, when real estate is in an LLC you do get  the step up in basis if you were to pass away and  

somebody inherits your property. And I'm not going  to go into detail what that means it's just a big  

tax advantage for inherited property. If you have  a property in an S corporation there is no step  

up in basis. That means when somebody inherits  your property they inherit your basis. So when  

they go to sell the property they're going to have  major capital gains most likely since real estate  

is an appreciating asset. So I'll probably go into  more depths about inherited property and stepped  

up basis in a different video but not today. Just  know that it is a big disadvantage to not have a  

stepped-up basis okay. The next thing I'm going to  talk about are Airbnb rentals, short-term rentals.  

So you know, similar thing to long-term rentals.  This is not a self-employment income, this is  

still passive income, it's not going to generate  self-employment taxes, so my recommendations here  

goes along with the long-term rentals. Now there  are going to be some CPAs that say that Airbnb  

should be considered self-employment tax. But  I think they might be confusing Airbnb's to  

bed and breakfasts which I'll go over next  okay. Airbnb, short-term rentals you know,  

in the traditional sense where people are just  renting your house from you, or your room from you  

for a few days, and then they take off, that's not  really bed and breakfast. So my recommendations  

here fall in line with the long-term rentals. Now  what's the difference between a short-term rental  

and a bed and breakfast? A bed and breakfast  is like a business that you operate out of the  

property. You know, the business being you  rent a room, and then you know, maybe your  

guest stays there for a week right so similar to  short-term rental that way. But during that time,  

maybe when the guest leaves for the day to do  their vacation stuff, maybe you go into the room  

and you clean the room, or maybe you you give them  breakfast in the morning, and lunch, and dinner.  

You know, you provide meals for them. Maybe you  provide some other concierge service for them  

you like arranging a taxi or Uber for them to go  travel, you know, or arranging transportation.  

This is what's considered substantial services  you know, where you're cleaning the rooms,  

you're providing meals, you're providing concierge  services, that is what makes it different  

you know, from an Airbnb or a short-term rental.  Bed and breakfasts are considered self-employment  

income and therefore you know, putting them  into an S Corporation could be beneficial here.  

Now there's one way to do it where you get  the best of both worlds, where you can get the  

stepped up basis on your property and avoid the  self-employment tax by putting it in an S-Corp.  

So usually my recommendations here are putting  the actual, the actual property, the ownership  

of the property should be owned by just an LLC, a  separate LLC that is not your bed and breakfast.  

Then I would put your bed and breakfast  operations into an LLC taxed as an S Corp,  

and therefore you save on the self-employment tax  of the bed and breakfast income and you're paying  

rent to your other LLC which owns the property.  This way your property is separated from your  

business income, and your property can still  get a stepped-up basis if you were to pass  

and somebody inherits the property. Alright the  last thing I'm going to talk about are fix and  

flips/wholesaling properties. So like I said  before fix and flips mean you purchase a property  

that is really haggard and run down and you know,  it needs a facelift, it needs some significant  

remodeling. You buy a property, you remodel it,  and you sell it for a profit at a higher price.  

You usually don't hang on to the property  more than a few months, ideally less than  

that you know, if you're wholesaling, you  might be hanging on to it for a few days.

So really a stepped-up basis is not a concern  here because you're not hanging, your goal isn't  

to hang on the property for a long time okay.  If you're hanging on the property for just a  

few months maximum, your basis, your purchase  price and selling price of the property you know,  

your basis and selling price they're not going  to be too different where it's going to be  

very significant if you were to pass you know,  during the time that you held onto a property.  

So fix and flips and wholesaling is considered  self-employment income and therefore  

if you were to put this business into an S  Corp you would save on self-employment tax  

okay. Now again, assuming that you're okay  with being like maybe a close group owner  

and you're okay with paying yourself a salary,  then yes this would be a probably a good idea.  

And again like I said since there are no concerns  about holding onto the property for a long time,  

your concerns about the basis of the property  when you pass away is very very minimal.  

So yeah in this instance I would say it's worth  it to put your business in an S Corp. Now before I  

end the video I just want to make sure that I let  you know that this is just my opinions and before  

you go refer, before you go doing anything, please  consult with your actual tax professional and your  

actual tax advisor. I am not trying to give you  tax advice right now. These are just my opinions  

that I'm sharing with you as my as my viewers.  Definitely seek professional tax advice before you  

make any moves. Feel free to contact us if  you want all right. But just don't just go  

off of any random YouTube video that you see  on YouTube, including mine. Alright so that's  

all I've got for today. Thanks for watching. Again  if you found this video helpful, please smash the  

like button. And if you're new here I would love  it if you'd consider subscribing to my channel.  

And yeah that's all I've got.  Stay safe out there and take care.