hey guys clint coons here and in this video we're going to talk about why
s-corporations are a horrible idea for owning rental real estate okay let's get started
okay so maybe you've already put yourself in this position where you've set up a limited
liability company and you chose to treat it as an s corporation or you're considering setting
one up and you know that an llc you can choose how you want to tax c corp s corp partnership
or disregarded entity and you've read somewhere that you can save on taxes with an s corporation
well that really applies in a context where you're running an active business
not with rental real estate you're not going to save anything
when you're using an s corporation rental real estate in fact you're probably going
to screw yourself and let me show you what i'm talking about so let's assume i create
a limited liability company i have this thing set up right here and it's a taxed as an s corporation
it holds this property and this property is has 300 000 equity inside of it okay now
i would like to refinance that property so since it's residential real estate typically what's
going to happen if you're going to a underwriter they're going to look at this and say no we cannot
refinance that property mr coons in the name of the limited liability company because it's
residential real estate and that would require commercial loan and it's not commercial property
blah blah blah so what do they want you to do they want you to deed the property out to yourself
so you're like all right that's cool i'll deed the property out to myself so you go down the counter
recorders and you need the property out and you put it in your own name now typically with many
counties when you pull property out of an entity in which you own 100 percent of or you and your
spouse whatever however it's structured it's a non-taxable transfer that means the county is not
going to tax you want the state says ah that's good you're the owner of it but you see the irs
they've got a different view of this scenario because this is an s corporation similar with c
corporations when you pull an asset that has appreciated 300k in equity out of an s corporation
that is a taxable event to you it's treated as a sale so as soon as you got that property
in your own name you have three hundred thousand dollars in income you're going to need to report
this year as if you had sold the property i see people make this mistake all the time with their
s corporations they take them out not realizing that when you remove an appreciated asset it's
taxable to you as the shareholder of that company now you might be thinking okay clint i'm going to
go find a portfolio lender that's going to do this deal for me so instead you don't pull the property
out of the s corporation you leave the property in and you'll find a community bank that's willing to
write your cash out refi on this property they're not going to give you 300 000 they're going to
give you 150k of that 300k equity they'll give 150k cash to your llcs corp and you're like
great and then you turn around you take out that 150 000 in cash right that you got on a loan
now most of us know how loans work right if we have property we get a loan against that property
it's not taxable to us because we owe that money back to the bank so we don't have to pay
taxes on that and that's the way it should work except when you're dealing with an s corporation
so with an s corporation when you take that 150 000 out goes in now to tax basis and your shares
and all this stuff more likely or not it's all going to be taxable to you yes even though it's
a loan it's going to be taxable to you so now you get hammered on the loan money as well so i hope
you understand these are the two major problems i have when we're talking about owning real estate
in an entity that's treated li as an s corporation so some of you may be in this situation right here
where you've set up an llc so you have your llc set up this is not uncommon and you've
been watching my videos and i've been telling you hey listen one property per llc you're like gosh
i made a mistake uh the individual i was working with we put three properties in this llc that's
taxed of course as an s corp all right because you missed that aspect of it and now you want
to gain asset protection you want to strip them out and put them in separate entities
so you're thinking hey i'm just going to create two other llc's right here and here and i'm going
to move those properties over and i'm going to own them all maybe you got your holding llc set
up i'm not going to go into that and this one that because that could be another issue here
you want to strip them out well guess what if you did that and you own these llc interest again when
you move this property out and that property out taxable event right it's treated as a property
sale so now you're thinking oh gosh i'm stuck i'm going to keep three properties in this one s corp
and i'm not going to get the level of protection that i really want which is to ensure that if
anything goes wrong with one property i haven't risked them all okay so i can't help you with
the s corp right you're gonna have to stay with that s corporation but what we can do is fix the
overall structure and that is we're not gonna go out okay on the sides we're not gonna go lateral
here and separate them out and have you own all these companies instead we're going to go vertical
what we're going to do is we're going to create three llc's up top like this and each
of those llc's are going to be owned by this s corporation so all these will be disregarded llc's
okay they're going to be disregarded now what i'm going to do is i'm going to take those three
properties and i'm going to move them out of the s corp and i'm going to put them into these
new llc's up here so i'll put them up here into these limited liability companies
and they're all going to be owned down by the s corp so now we pull them out of here
and we put them up here in the disregarded llc's that type of transfer no tax issues for you
because on the s corporation's tax return it's still going to show these three properties as if
it owns them because the llc's are disregarded so from the irs's point of view yeah the s
corporation does own them now if you've got this s-corp here and you want some protection for it
and you're wondering how can you structure it something that you could consider is you
could have that interest held by a wyoming llc down here you could set that up and you
can have your shares owned by that but this wyoming llc has to be disregarded as well
so this isn't something you should even attempt on your own without consulting with a strategist who
understands the nuances of using s corporations i mean they create problems for us all the time
we're working with real estate investors who come to us and they've already set these structures
up so we have to be a little more careful in the planning to ensure that we do not create taxable
events all right guys if you liked the video give me some likes subscribe if you haven't be sure
to check back next week for more great content on tax and asset protection for real estate investors
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