Don?t Own Rental Real Estate in a C-corporation! Here is Why?

(Article 1.0): Don?t Own Rental Real Estate in a C-corporation! Here is Why? By: Darius M. Barazandeh, Attorney at Law / M.B.A.

Selecting a business structure for real estate is confusing for many new investors. So my job will be to simplify these issues and give you some concrete information to help you go forward. I also have several articles in this series so be sure to view them all.

When you think about a business structure what?s the first type you think about?

About 80% of you will say: The corporation. Well since most of you are already thinking about the corporation, we will discuss it here.

Some of you may know that the corporation is the oldest business entity. In an earlier article, I discussed the corporation?s use to fund the colonial American settlement and exploration. In essence, the corporation was used to allow investors to fund trade expeditions without personal liability from the activities of the expedition.

Here is a key rule that you will want to write down, underline, and remember: In most situations you do not want to hold or OWN RENTAL REAL ESTATE in a C-corporation. That?s right, I said you don?t want to hold or own rental real estate in C-corporation.

Notice another thing I just mentioned (and I quote): In most situations you do not want to?OWN RENTAL REAL ESTATE in a C-corporation. Notice I used the word, ?OWN?.

Why is this? Its not because the C-corporation has poor asset protection features?actually it has somewhat ?acceptable? asset protection features (NOTE: I?ll explain why they are only ?acceptable? ? see one of my other articles) For now, realize that you have a battle to wage on two fronts:

1) The Liability Front and 2) The Tax Front.

With the C-corporation its liability protection does pass muster (to some extent)?but what about the tax side?

Here is where the problem occurs: Remember and write down this rule: It?s very easy to transfer a property and assets into an entity?but you have to think about the consequences when you try to take the money or property out of the entity. C-corporations can create what?s called ?double taxation? when you try to take money out of the corporation.

In most situations the only way to get large sums of money out of a small to mid-sized corporation is to pay a dividend. A dividend is a payment made to owners of the company. The problem with a C-corporation dividend is that it?s ?taxed twice?. Therefore, when an owner sells a high dollar property owned by a corporation and then tries to get the money out?most of the time they will be ?double taxed?. This can equal a tax rate of 60% or more!

Remember that real estate on average goes up in value. Ironically, its what we love about real estate that also makes it dangerous for the owner of a C-corporation. You may say, ?Well, Darius I just don?t understand what you mean.?

Consider this: We love to invest in real estate because it goes up in value, BUT the trouble is if you make money on your real estate and then try to remove the money from the corporation you can have large tax consequences because of this ?double taxation? problem. There is only so much money that you can take out as a salary. Sooner or later, if you want to pull big money out of corporation, a dividend will be needed.

Here are few other reasons why the C-corporation is ?No-No? for owning long-term/ rental real estate:

1) There are also other IRS penalties for small C-corporations if 60% or more of the corporation?s income comes from rents. Again, most owners of long- term real estate (which is not their home) will want to rent out each property. If the corporation derives a large portion of its income from rents, royalties or other designated sources, then this penalty will apply. 2) C-corporations cannot take advantage of Capital Gains tax rates. This is a major disadvantage as well. We will discuss capital gains rates in a later article.

3) Rental Property Losses: Another disadvantage can occur if your rental property has losses. The reason is that these losses will stay locked up in C-corporation and are not passed down to owners. This can create another tax disadvantage.

4) I?ll repeat the ?double taxation? problem here because it is such a harsh penalty. Harsh penalty?remember that!

5) There are even more reasons, but I think you get the point: Don?t Own Long-Term or Rental Real Estate in a C-corporation!

In the next article in this series I will discuss the best entity choices for real estate investors. You can find the rest of these articles on this website.

To learn more about which entity may be best for you and how to create, run, and maintain an ?iron clad? LLC or corporation, you don?t need a grant from the King or Queen?but you should see Mr. Barazandeh?s, Incorporate for Wealth ? and Wealth Building LLC ? courses at www.theinformedinvestor.com and www.attorneysecrets.com.

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As a licensed attorney and former business consultant, Mr. Barazandeh brings a high level a professionalism teamed with in-depth legal and business knowledge to the world of real estate coaching and training.