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You are here: Home > I Just Got a Rental, What Do I Do? > Chap 1 - Ownership Arrangements > Rental Property In C Corporations

  • 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
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Rental Property In C Corporations

rental property corporationBy Jason Watson, CPA
Posted Saturday, August 3, 2024

We have seen some real estate investors leverage the C corporation in similar fashion. They inject a bunch of cash into the entity, and then buy a gaggle of rental properties with cash and debt. Every spare dollar is used to pare down debt, and any taxable income (rental profits) is paid at 21%. Later they elect S Corp status on the entity, wait 5 years for the built-in gains (BIG) tax waiting period, and then sell the rental properties at individual long-term capital gains rates (plus depreciation recapture).

Can you still do that big cost segregation study with that big depreciation deduction? Yes. Does it have the same thrill? Not really if you are currently at a 37% marginal tax bracket with your personal income. In other words, the wow factor at 21% is not the same as 37%.

What makes matters worse is that your rental property is likely to have losses in the early years, and to pile on with accelerated depreciation does nothing for you. In other words, to accelerate deprecation to accelerate your cash flow by lowering taxes requires taxable income. This is usually in the form of W-2 wages found on an individual tax return (Form 1040) and not a corporate tax return (Form 1120).

Of course, this assumes passive activity loss limits are being bypassed with real estate professional status or short-term rental loophole. Conversely, if you cannot accelerate your cash flow and you want to plow excess cash back into debt reduction, the C corporation might work.

Do you miss out on the Section 199A qualified business income deduction (QBID)? Yes. But consider the highest tax bracket of 37% multiplied by 20% yields a 7.4% delta which is still less than the delta between 37% individual tax rates and 21% C corporation tax rates. You might not benefit from the QBID if you are in the 37% marginal tax bracket given the secondary testing starting at the 32% marginal tax bracket.

Stessa and some other real estate CPAs say Never to rentals and C Corps. WCG CPAs & Advisors disagree. However, super duper careful tax planning is necessary. A crystal ball helps too.

There might be an issue with accumulated earnings tax (AET), but don’t get too hung up on that since depreciation will reduce earnings (tax loss or tax neutrality, but cash “gain”). Then later on down the line you elect S Corp tax status on this C Corp and you have the best of both worlds… reduced income tax for some time, and then avoided double taxation as you start pulling out excess cash from rental income or from property sales.

As you look to other investors and players in your real estate property purchase, don’t forget the golden rule where the person who has the gold makes the rules. Said differently, if an investor or venture capitalist wants to put their money with you, and they will only do so under a C corporation regime, you are stuck between a rock and a hard place.

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

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

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