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.