Incorporating new company - LLC or an S-corp in NY
rapapple
buying a two-family house and intend to rent it out for
approximately $2000/month. Which is the best organization
type for this? Or is it best to not organize at all?
I am doing this solo, but I could hav emy wife be a partner
if 2 members are needed for an LLC in NY.
Thanks in advance for any input? Cheers.
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John H. Fisher
> buying a two-family house and intend to rent it out for
> approximately $2000/month. Which is the best organization
> type for this? Or is it best to not organize at all?
>
> I am doing this solo, but I could hav emy wife be a partner
> if 2 members are needed for an LLC in NY.
>
> Thanks in advance for any input? Cheers.
You really don't have to organize under any type of business
entity. Doesn't make any difference whether or not your
spouse has anything to do with it. On your tax return or a
jointly filed return (likely the favored choice), you'd
report the income and expense on Schedule E (Form 1040)
"Supplemental Income" and attach it to your personal tax
return for the year.
Likely, that's the best route to take, along with a good
liability policy. Check it out with a tax professional.
Likely that will save you much more than the cost. In any
event NEVER form an entity outside of yourself unless you
know exactly why you are doing it.
"Jack" - John H. Fisher - TaxSe...@aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html
Where Ignorance is bliss, 'tis folly to be wise!=:)
Tom Healy
> buying a two-family house and intend to rent it out for
> approximately $2000/month. Which is the best organization
> type for this? Or is it best to not organize at all?
>
> I am doing this solo, but I could hav emy wife be a partner
> if 2 members are needed for an LLC in NY.
>
> Thanks in advance for any input? Cheers.
There are two very important rules regarding putting
real estate into a corporation:
1. Don't ever do it.
2. If in doubt, refer to rule 1.
Therefore, use an LLC, not an S corporation.
--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: t...@tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
Linda Dorfmont
put real estate into a corporation of any kind? I have other
clients making the same decision.
Linda Dorfmont E.A., CFP, CSA not CPA
Frederick Jorden
> Could you give us non-CPA types a short course on why not to
> put real estate into a corporation of any kind? I have other
> clients making the same decision.
>
> Linda Dorfmont E.A., CFP, CSA not CPA
But sometimes a corporation is used as an nominee to hold
real estate.
--
Frederick E. Jorden http://Tax-Accounting-Payroll.com
7825 Midlothian Tpk - 207 Richmond, VA 23235-5247
EMAIL kno...@bigfoot.com
(804) 320-6210 FAX (804) 320-6211
Stuart Bronstein
> Linda Dorfmont wrote:
>> Could you give us non-CPA types a short course on why not to
>> put real estate into a corporation of any kind? I have other
>> clients making the same decision.
Generally it comes down to the depreciation deductions being
much more valuable to the individual than to the
corporation. And particularly with small corporations
depreciation may be completely wasted if the property is
owned by a corporation.
> But sometimes a corporation is used as an nominee to hold
> real estate.
If a corporation holds title to property for the convenience
of someone else, that corporation is technically a trustee.
I don't know the rules in other states, but in California a
corporation is prohibited from holding property as a trustee
unless it is qualified as a trust company.
Stu
Tom Healy
>> put real estate into a corporation of any kind? I have other
>> clients making the same decision.
It's basically a problem of how to get the real estate out
of the corporation without selling it. Even with an S
corporation, gain would be recognized on the distribution of
property. And with a C corporation there is no special rate
for capital gains, and double tax on the distribution. And
who's to say that S corporation rules might change to your
detriment at some future date. With an LLC no gain or loss
is generally recognized when property is distributed.
--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: t...@tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
<< ------------------------------------------------->>
Frederick Jorden
> Frederick Jorden wrote:
>> Linda Dorfmont wrote:
>>> Could you give us non-CPA types a short course on why not to
>>> put real estate into a corporation of any kind? I have other
>>> clients making the same decision.
> Generally it comes down to the depreciation deductions being
> much more valuable to the individual than to the
> corporation. And particularly with small corporations
> depreciation may be completely wasted if the property is
> owned by a corporation.
>> But sometimes a corporation is used as an nominee to hold
>> real estate.
> If a corporation holds title to property for the convenience
> of someone else, that corporation is technically a trustee.
> I don't know the rules in other states, but in California a
> corporation is prohibited from holding property as a trustee
> unless it is qualified as a trust company.
I do know that it was done in NY.
--
Frederick E. Jorden http://Tax-Accounting-Payroll.com
7825 Midlothian Tpk - 207 Richmond, VA 23235-5247
EMAIL kno...@bigfoot.com
(804) 320-6210 FAX (804) 320-6211
<< ------------------------------------------------->>
Linda Dorfmont
business entities. One of them made a note in her book:
"putting real estate in a C or S corp is malpractice". I
guess the CPA community is very opposed to this method of
liability protection.
Linda Dorfmont E.A.,CFP,CSA
Stuart Bronstein
> Some of my colleagues just got back from a GearUp Seminar on
> business entities. One of them made a note in her book:
> "putting real estate in a C or S corp is malpractice". I
> guess the CPA community is very opposed to this method of
> liability protection.
Because with respect to liability, a corporation does not
protect property owned by the corporation, but property that
is _not_ owned by the corporation.
Stu
Brian Collie
> Some of my colleagues just got back from a GearUp Seminar on
> business entities. One of them made a note in her book:
> "putting real estate in a C or S corp is malpractice". I
> guess the CPA community is very opposed to this method of
> liability protection.
Yes, the tax results are terrible. Try an LLC.
Gene E. Utterback, EA
> Some of my colleagues just got back from a GearUp Seminar on
> business entities. One of them made a note in her book:
> "putting real estate in a C or S corp is malpractice". I
> guess the CPA community is very opposed to this method of
> liability protection.
But did she tell you why?
Remember, C corporations do not get the benefit of a reduced
tax rate on capital gains, ALL net income as taxed at the
ordinary corporate rates. With the understanding that real
estate is (almost) always an appreciating asset that is
being depreciated, when it is sold by a corporation the
corporation pays tax at the marginal rate on the gain. How
happy would your client be if YOU recommended they put a
$3.5 Million Dollar hotel in a C corporation, depreciated it
down to $3.0 Million and then sold it for $10.0 Million and
had to pay corporate taxes on the gain starting at 41% -
especially when they could have formed an LLC to hold the
real estate, then passed the gain through to the owners who
would be taxed at 15% on the same gain.
Before you raise the S corp flag - the reason real estate
doesn't belong in an S corp is because the S corp status is
subject to review and revocation by the IRS. So even though
an S corp is eligible to pass through the gain to the owners
(just like an LLC) if the IRS attacked the S status you
could wind up with a C corp and no relief. It is much
harder for the IRS cannot attack LLC status.
Now please excuse me while I jump up on my soapbox for a
moment - I have several clients who own rather expensive
pieces of real estate, some because the property cost a lot,
but most because property values have appreciated
substantially since the acquired the property. Every single
corporate client that has come to me in the last 20+ years
that is holding real property inside a corporation (S or C)
when I raise this issue has said, AND I QUOTE "my attorney
didn't say anything about this."
IMNHO, most attorneys seem to think that because being an
attorney automatically allows them to represent taxpayers
before the IRS and Tax Court that they are automatically tax
experts; for some reason they act like consulting with a tax
professional is beneath them and quite a few of the ones
I've had to deal with over the years are arrogant refuse to
admit that they are providing a DISservice to the client
when they form a corporation that is going to hold
appreciating property. I've managed to educate some of
these folks, but most stick by their battle cry "there is
nothing illegal about a corporation owning real estate!).
I've also found it interesting that these same attorneys do
not hesitate to get tax help when THEY are ready to buy an
office building.
OK, I'm down off my soapbox now,
Gene E. Utterback, EA
Stuart Bronstein
> "Linda Dorfmont" <DORF...@aol.com> wrote:
>> Some of my colleagues just got back from a GearUp Seminar on
>> business entities. One of them made a note in her book:
>> "putting real estate in a C or S corp is malpractice". I
>> guess the CPA community is very opposed to this method of
>> liability protection.
> Before you raise the S corp flag - the reason real estate
> doesn't belong in an S corp is because the S corp status is
> subject to review and revocation by the IRS. So even though
> an S corp is eligible to pass through the gain to the owners
> (just like an LLC) if the IRS attacked the S status you
> could wind up with a C corp and no relief. It is much
> harder for the IRS cannot attack LLC status.
The IRS used to attack various entitled that had the aspects
of current LLC's all the time, often determining that they
were really associations taxable as corporations. With the
current crop of LLC laws, the states all obtained letter
rulings approving the tax status of entities created under
those laws. So they may be harder to attack, but certainly
not completely free from the possibility. (Though the
impression I have is that the IRS has pretty much given up
the issue, at least for the time being.)
> Now please excuse me while I jump up on my soapbox for a
> moment - I have several clients who own rather expensive
> pieces of real estate, some because the property cost a lot,
> but most because property values have appreciated
> substantially since the acquired the property. Every single
> corporate client that has come to me in the last 20+ years
> that is holding real property inside a corporation (S or C)
> when I raise this issue has said, AND I QUOTE "my attorney
> didn't say anything about this."
Yes, I've also seen too many attorneys who think they know
it all and in reality don't. I tell people that an attorney
may be good at putting together the paperwork to form a
corporation, but he's the LAST person (well, right after
your old uncle Louie) to talk to about whether a particular
business should incorporate.
I've also seen lawyers do some other very stupid things.
> IMNHO, most attorneys seem to think that because being an
> attorney automatically allows them to represent taxpayers
> before the IRS and Tax Court that they are automatically tax
> experts;
I don't think it has anything to do with their ability to
represent taxpayers. It's just an unfortunate combination
of ego, arrogance and ignorance. I know one lawyer who says
he "does" corporations, but has no knowledge at all of tax
or securities laws.
> for some reason they act like consulting with a tax
> professional is beneath them and quite a few of the ones
> I've had to deal with over the years are arrogant refuse to
> admit that they are providing a DISservice to the client
> when they form a corporation that is going to hold
> appreciating property. I've managed to educate some of
> these folks, but most stick by their battle cry "there is
> nothing illegal about a corporation owning real estate!).
The thing to do would be to find a case in which someone
(attorney or accountant) got sued for malpractice for doing
something like this. That would get their attention.
> I've also found it interesting that these same attorneys do
> not hesitate to get tax help when THEY are ready to buy an
> office building.
Because they know there's a tax issue involved. When it's
one of their clients, it just never occurs to them.
I don't know how to stop this kind of stupidity. But if tax
professionals can spot it as soon as possible, damage can be
limited if not prevented.
Stu
Mark Rigotti, CPA
Gene,
Quick Hurry Rush - Get back on that soapbox. NO?
Can I barrow your soapbox? Thanks.
Estate Planning, Divorce Planning, College funding, Choice
of Entity for start up businesses, etc. the list goes on and
on.
Hell, we do this full time and have a difficult time keeping
up with the ever changing tax laws (see the two tax acts
signed into law last month for an example) How can they
stay current with both tax laws and other laws at the same
time???? I've yet to meet an attorney (other than one that
actually specializes in tax law) that is as competent as
myself. (quite frankly I sometimes wonder just how
compentent I am)
--
Regards,
Mark Rigotti
Shyster1040
rules (subject always to substantial economic effect) that
permit you to allocate items in a fashion other than
strictly pro-rata (S-Corp status requires pro-rata
allocation). Also, S-Corps cannot have nonresident aliens,
corporations, or other partnership-type entities as
shareholders, which restricts your ability to get investors
involved or, e.g., sell the property by simply selling the
holding entity (which I mention without getting into those
tax details - always consult with a tax professional and
give them all the facts before you assume a given
transaction will work right tax-wise).
In terms of getting liability protection, an LLC will give
you just as much protection in non-tax terms as a C-corp
gives you; remembering that in most cases a creditor is
going to want a personal guarantee from the shareholder
owner anyways, thereby defeating much of the assumed
protection (stay away from guarantees of payment if you can,
go with guarantees of collection only).
Stuart Bronstein
> Hell, we do this full time and have a difficult time keeping
> up with the ever changing tax laws (see the two tax acts
> signed into law last month for an example) How can they
> stay current with both tax laws and other laws at the same
> time???? I've yet to meet an attorney (other than one that
> actually specializes in tax law) that is as competent as
> myself. (quite frankly I sometimes wonder just how
> compentent I am)
Even lawyers who do tax law all the time and have their CPA
certificates, emphasize different legal aspects of the tax
laws. So even people with those qualifications should not
be relied on solely when dealing with specific situations
that may not follow the general case.
For example, I have generally refused to set up corporations
for people who have not run it by their tax pro to determine
exactly what would be best for them.
Stu
Linda Dorfmont
any time. It is better for me to explain to those clients
who ask Why? that all these bad things can happen to them if
they put their real estate in a corporation instead of an
LLC. One other problem that my 5 shareholders have already
experienced is that getting the profits our of the
corporation involves taking directors' fees which are
subject to self-employment tax. This earned income can also
affect negatively the Social Security benefits that the
younger of the group are receiving. Also some of them may
have rental real estate outside the corporation which is
operating at a loss. The profits from the corporate real
estate investment can be offset by the other losses.
Linda Dorfmont E.A., CFP, CSA
<< ------------------------------------------------->>
Christopher Green
> Thank you for your explanation. You can get on your soapbox
> any time. It is better for me to explain to those clients
> who ask Why? that all these bad things can happen to them if
> they put their real estate in a corporation instead of an
> LLC. One other problem that my 5 shareholders have already
> experienced is that getting the profits our of the
> corporation involves taking directors' fees which are
> subject to self-employment tax. This earned income can also
> affect negatively the Social Security benefits that the
> younger of the group are receiving. Also some of them may
> have rental real estate outside the corporation which is
> operating at a loss. The profits from the corporate real
> estate investment can be offset by the other losses.
A reason not mentioned in all of the above, which I believe
is actually a rather important reason, has to do with
suspension of losses.
Losses in an S corporation that exceed shareholder basis
(which consists of contributions and shareholder loans to
the corporation) are suspended: they cannot be passed
through to the shareholders until there is offsetting
income. Thus shareholders get no current tax benefit from
such losses.
S corp basis doesn't include third-party debt: say the corp
takes out a bank loan to carry real estate, then loses money
in excess of shareholder basis. The losses are suspended.
But carry out the same scenario in an LLC, and the losses
are allowed.
Since forming an entity that can't borrow money on its own
account to carry investments doesn't add much value to the
venture, forming an S corporation to hold real estate is
something of a nonstarter (even before you get to dealing
with the S corporation passive income rules).
--
Chris Green