Last week on Facebook, I made a comment: “Never hold real estate in a C corporation… and fire the advisor that even suggests such a thing.” And many people asked, “Why not?” Well, there are three reasons.
Reason #1: Capital Gains Taxes Will be Higher When Selling
First, for tax reasons we don’t recommend that you ever hold real estate in the name of a C corporation. Your C corporation will pay considerably more in capital gains when you try to sell that property than would a flow-through entity, such as an LLC.
Reason #2: Asset Protection is Not as Secure for Property Held in a Corporation in Most States
The second reason is if your C (or S) corporation is holding the property and you are sued personally, a judgment creditor (except with a Nevada corporation) may be able to reach your shares in the corporation and effectively take control of those shares and through them, control of the corporation and its assets. If properly structured, using Nevada and Wyoming LLCs and limited partnerships (LPs), you will have much better asset protection than with other entities. For these reasons we recommend that real estate be held in either an LLC or LP.
Reason #3: Transferring Property Out of a Corporation is Taxable
As well, transferring property out of a C or S corporation is a taxable event whereas it is not taxable in an LLC or LP. When it comes time to refinance, you will appreciate an LLC or LP.
However, you can have your corporation buy real estate. One method is to have your corporation pay rent for an office building which is owned by a separate LLC that you own. The rent paid by the corporation is a tax deduction for the business and the income from the rent is offset by operating expenses as well as the phantom expense of depreciation.
For more information on this topic, please read my book Loopholes of Real Estate, which will teach you how to open up the tax loopholes available only to real estate investors and close the legal loopholes of unlimited personal liability.