Investing in real estate is generally a great long-term plan. The market has cooled off in most parts of the country, so good properties are available at attractive prices. However, taxes can be a major concern for C-corporations. Owning real estate puts you at risk of being double-taxed.
If you ultimately sell a property held by a C-corp and make a profit, the gain may be subject to taxation twice. First, it can be taxed at the corporate level. Second, it can be taxed at the shareholder level when the corporation pays out provides to shareholders as dividends.
This double-taxation threat was reduced by the Tax Cuts and Jobs Act of 2017. Looking ahead, however, federal debt issues could ultimately force lawmakers to hike up corporate tax rates and/or tax dividends at higher-than-ordinary income rates.
Before purchasing and holding property as a C-corporation, you will want to consider alternative strategies. We recommend using a single-member LLC or a revocable trust to hold real property. A single-member LLC offers simpler tax treatment along with corporation-like liability protection. A revocable trust, on the other hand, can avoid probate to save you time and money.
A multi-member LLC can also be effective if you co-own the property. A multi-member LLC offers several tax advantages thanks to partnership taxation rules. One such benefit is pass-through taxation.
Holding real property in a C-corporation is risky business, especially when real estate prices are somewhat down and long-term appreciation could be strong. You could later be double-taxed on any gains when it is time to sell. A single-member LLC, multi-member LLC or revocable trust will be a better tax-advantaged solution compared to a C-corp in most situations.
Of course, the best financial plan and real estate investment strategies will depend on your specific situation. It’s important to have a plan that is suited to you and your financial goals. Illumination Wealth can help. Contact us today to talk with one of our experienced advisors. Take the next steps toward financial independence!