Here are 10 reasons you may want to avoid holding real estate in an S-corp.
Here are 10 reasons you may want to avoid holding real estate in an S-corp.
1. S-Corporations are on the IRS “hit list” and audited much more than partnerships.
2. S-Corps are designed for active (ordinary income) businesses. Thus, using an S-Corp for flips is a blatant admission of costly dealer status and impairs dealer-avoidance planning.
3. An S-Corporation is subject to more payroll filings because S-Corp shareholders are employees and must receive a reasonable salary.
4. An S-Corporation is subject to more IRS scrutiny and controversy over the issue of paying “reasonable compensation” to shareholders.
5. S-Corps have limits on fully deducting rental property tax losses because such losses are limited to the shareholder’s basis in the S-Corp’s stock, which does not include third party debt, such as a mortgage. Result: A loss of current tax savings.
6. S-Corp distributions of tax-free borrowed money to shareholders could end up being taxable because of the above basis limitations.
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7. Termination of an S-Corp status freezes the deductibility of unused carryover losses.
8. Taxation on distributions of appreciated property deeded from the S-Corporation to the shareholder, although no cash is realized.
9. Taxation on the liquidation of the entire S-Corp entity (with appreciated assets) even though cash may not be realized.
10. Conversion of an S-Corporation (with appreciated assets) to an LLC will result in tax liabilities even though cash may not be realized.
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