Watson CPA Group
Email Phone Fee Info Consult Portal Chat
  • Email
  • 719-387-9800
  • Phone
  • Text Us
Watson CPA Group
  • Fee Info
  • Consult
  • ShareFile
You are here: Home > I Just Got a Rental, What Do I Do? > Chap 1 - Ownership Arrangements > Real Estate Holding Company and Operating Company

  • I Just Got a Rental, What Do I Do?

    • Introduction

      • About the Author
      • Progressive Updates
      • Introduction Disclaimer
      • Shameless Self-Promotion
      • Book Introduction
      • Quick Reference 2023
      • Quick Reference 2024
      • Glossary
    • Chap 1 - Ownership Arrangements

      • Real Estate and Rental Properties as a Business
      • Basic Business Entities For Real Estate Investment
      • Sole Proprietorship
      • Single-Member Limited Liability Company (SMLLC)
      • Multi-Member Limited Liability Company (MMLLC)
      • Limited Liability Partnerships (LLP) and General Partnerships (GP)
      • Rental Property In Partnership Entities
      • C Corporations
      • Rental Property In C Corporations
      • S Corporations
      • Pass-Through Versus Disregarded Entity Taxation
      • Your Spouse As A Business Partner (Happy Happy Joy Joy)
      • Owning A Rental Property With Others
      • Real Estate Investing With Family Partners
      • Real Estate Holding Company and Operating Company
      • Pure LLC Holding Company
      • Economic versus Equity Interests
      • Structuring Real Estate Deals with Angel Investors
      • Loans or Capital Injections
      • LLC Benefits For Rental Properties
      • Multi-Entity Rental Property Tiered Structure
      • Using a Trust In Your Real Estate Holding Company
      • Operating Agreements For Real Estate Partnerships
      • Real Estate Succession Planning
      • Fallacy Of A Nevada LLC (or Delaware, or Wyoming, or wherever!)
      • Liability Protection Fallacy Of An LLC
      • Charging Orders
      • Using A Self-Directed IRA Or 401k To Buy A Rental Property
      • Trapped Rental Assets In An S Corporation
    • Chap 2 - Initial Asset Management

      • Getting The Rental Business Launched
      • Rental Property Acquisition Costs
      • Real Estate Asset Setup On Your Tax Returns
      • Cost Segregation Study
      • Retroactive Look-Back Cost Segregation Study
      • Converting Primary Residence To A Rental
      • Moving Your Rental Property Into An LLC
    • Chap 3 - Rental Property Tax Considerations

      • Three Types of Income
      • Passive Activity Loss Limits
      • Passive Income Generators (PIG)
      • Your Small Business As A Passive Income Activity
      • Material Participation Rules
      • What Time Counts For Material Participation
      • Real Estate Professional Status (REPS)
      • Short-Term Rental (STR) Loophole
      • Vacation Home Rules
      • State Problems With Your Rental Property
    • Chap 4 - Rental Property Tax Deductions

      • Chapter Introduction
      • Five Basics to Warm Up To
      • Value of a Rental Property Tax Deduction
      • Rental Property Tax Deductions Themes
      • Section 199A Rental Property Deduction
      • Common Rental Property Tax Deductions
      • Allocation of General Rental Expenses
      • Rental Property Travel Deductions
      • Rental Property Meals
      • Mortgage Interest Tracing
      • Acquisition Costs (revisited)
      • Rental Property Repairs Safe Harbor (revisited)
      • Repairs Versus Improvements (revisited)
      • Rental Property Depreciation (revisited)
      • Automobile Deductions with Rentals
      • Automobile Decision Tree
      • Home Office Deduction
      • Real Estate Education Expenses
      • 185 Rental Property Tax Deductions You Cannot Take
      • Deductions the IRS Cannot Stand
      • Cohan Rule For Rental Property Owners
      • Reducing Taxes
    • Chap 5 - Operational Asset Management

      • Rental Property Repairs Safe Harbors
      • Improvement Versus Repairs
      • Rental Property Renovations (Rehab)
      • Accelerated Depreciation and Section 179 Deduction
      • Allowed Versus Allowable Depreciation
      • Qualified Improvement Property (QIP)
      • Partial Asset Disposition (PAD)
      • 1031 Like-Kind Exchange
      • Selling Your Rental Property
      • Buying Out Your Real Estate Partner
      • Taking The Rental Out of Service
      • Changing Depreciation Between 27.5 and 39.0 Years
    • Chap 6 - Retirement Planning

      • Retirement Planning Within Your Rental Property
      • Basic Retirement Planning
      • Tax Savings and Tax Deferrals
      • The Owners-Only 401k Plan
      • Roth 401k Plans
      • Roth 401k Versus Traditional 401k Considerations
      • Two 401k Plans
      • Rolling Old 401k Plans or IRAs into Your Small Business 401k Plan
    • Epilogue

      • Rental Property Tax Return Preparation
      • Rental Property Accounting
      • Real Estate CPAs
Home
  • WCG
  • I Just Got a Rental, What Do I Do?
  • Chap 1 - Ownership Arrangements
  • Real Estate Holding Company and Operating Company
Print

Real Estate Holding Company and Operating Company

holding companyBy Jason Watson, CPA
Posted Saturday, August 3, 2024

This is one of the most common situations where you own two entities that conduct business between themselves. For example, you are a typical poor accounting firm with the usual high maintenance clients, and you feel that everything would be better if you also owned your own office building. You would create an LLC as the holding company which owns the building, and another LLC (and probably taxed as an S Corp) for the operating company.

This allows for some excellent ownership separation. For example, if you and your father-in-law own the building, he doesn’t have a stake in your accounting firm, and vise-versa (didn’t we just scare you with this idea, and now we are bringing it up as an example… we’re evil). You might also want to make one of your key employees a business partner in your operations, but he or she should not have a stake in the building. Chinese Wall. Can we use Chinese Wall as a separation analogy anymore? We likely offended someone.

Please keep in mind that rental properties including self-rentals are mostly wealth-building strategies and not tax reduction strategies. Yes, depreciation and perhaps even cost segregation can yield some accelerated tax savings, but even that is primarily a wealth-building move.

real estate holding companyThe holding company and operating company arrangement can also reduce self-employment taxes or payroll taxes since this conduit changes the color of money. Huh? As discussed in an earlier chapter, your accounting firm’s income is earned income, taxed both at the self-employment tax level (or payroll tax level) and the income tax level. However, you reduce this earned income by the amount of rental expense and that subsequent rental income on the other end is considered passive and only taxed at the income tax level (technically non-passive since it is a self-rental under Section 469, but let’s not muddy the waters).

Beauty! You must have a lease and the rent must be market rates; usually a rent appraisal from an independent appraiser will suffice. The rent appraisal is also a good idea in the expansion of ownership. For example, Jason and Tina Watson own the building that WCG CPAs & Advisors leases. As WCG expands its ownership to other partners, the rent payment to Jason and Tina needs to be above reproach; ergo, a rent appraisal. This reduces office politics and hurt feelings. Maybe just office politics.

Jason Watson, CPA, is a Senior Partner of WCG CPAs & Advisors, a boutique yet progressive tax,
accounting and business consultation firm located in Colorado serving real estate investors worldwide.


Jason Watson CPA LinkedIn     Jason Watson CPA Email

real estate cpa

I Just Got A Rental, What Do I Do? 2024-2025 Edition

This KB article is an excerpt from our 320+ page book (some picture pages, but no scatch and sniff) which was released September 30, 2024, and is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information.

s corp book amazon s corp book kindle s corp book pdf
$19.95 $15.95 $12.95

Talk to a Real Estate CPA About Your Rental Property

Please use the form below to tell us a little about yourself, and what you have going on with your investments and wealth-building objectives. WCG CPAs & Advisors are real estate CPAs, tax strategists and rental property consultants, and we look forward to talking to you!

We typically schedule a 20-minute complimentary quick chat with one of our Partners or Senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax prep, and more importantly tax strategy and planning?

Should we need to schedule an additional consultation, our fee is $250 for 40 minutes. Fun! If we decide to press forward with a Business Advisory or Tax Patrol Services engagement, we will credit the consultation fee towards those services.

Appointments are typically held through Microsoft Teams and are scheduled on weekdays during the work day. Yes, we can easily accommodate nights and weekends, but those are reluctantly agreed to after some eye-rolling and complaining. Additionally, our schedules are more compressed during tax season (who would have thought, right?).

Shockingly we will return all appointment requests via email with 24-36 hours weather-permitting, or perhaps a phone call (if the moment strikes us). No black holes here! In a hurry, please call us at 719-387-9800 or use our chat service in the lower right corner or the button below.

Text WCG Offices
Call Our Amazing Team
Chat With A Tax Pro
Previous Real Estate Investing With Family Partners
Next Pure LLC Holding Company
watsoncpabackground-01
Taxpayers Comprehensive Guide to LLCs and S Corps
2023-2024 Edition
DOWNLOAD OUR BOOK
watsoncpabackground_sep2019-01
LIKE US ON FACEBOOK
SUBSCRIBE TO YOUTUBE CHANNEL
CONNECT WITH US ON LINKEDIN
FOLLOW US ON TWITTER
taxes_2
Next deadline is April 15, 2024
for Q1 estimated tax payments!
watsoncpabackground_sep2019-01 - copy
LIKE US ON FACEBOOK
SUBSCRIBE TO YOUTUBE CHANNEL
CONNECT WITH US ON LINKEDIN
FOLLOW US ON TWITTER
businessman_2
Our firm will take you through the financial
cycles of your personal and business lives.
Call Today
watsoncpabackground_sep2019-01 - copy - copy
LIKE US ON FACEBOOK
SUBSCRIBE TO YOUTUBE CHANNEL
CONNECT WITH US ON LINKEDIN
FOLLOW US ON TWITTER
previous arrow
next arrow

Resources

  • Beyond Sole Proprietorship
  • S Corp Election
  • Late S Corp Election
  • Reasonable Shareholder Salary
  • Section 199A Deduction
  • Business Tax Deductions
  • Business Retirement Plans
  • LLC (Sched C) Tax Prep
  • Business Tax Prep
  • Business Services Proposal
  • Periodic Business Review
  • Aug and Nov Tune-Ups

Quick Links

  • Client Portal (secure)
  • Send A File (secure)
  • Engagement Agreement
  • Tax Checklists
  • Send Us a Payment
  • eFile Authorization
  • Tax Return Extension
  • Fee Info (transparency)
  • Tax Consultation
  • History of WCG
  • Privacy Policy

Portals

  • Business Formation Services
  • Small Business Consulting Services
  • Getting Started (tax prep)
  • Tax Preparation Center
  • Tax Support
  • Knowledge Base
  • WCG Blog
  • Contact Us
  • Fee Structure
WCG Inc. | 2393 Flying Horse Club Drive, Colorado Springs, CO 80921 (formerly Watson CPA Group PLLC) | 719-387-9800 tel, 855-345-9700 fax, 719-345-2100 txt | WCG Inc. (License FRM.5000080) is supervised by Tina Denise Watson, CPA (License CPA.0022434) | XML Sitemap | Services Sitemap | Knowledge Base Sitemap

Information provided on this web site “Site” by WCG Inc. is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although WCG Inc. has made every reasonable effort to ensure that the information provided is accurate, WCG Inc., and its partners, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. WCG Inc. also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.