What legal structure provides the best tax benefits for real estate investing?

What is the name of your state? NJ

Hello All,

A few friends and I would like to buy houses, fix them up, and sell them. We will each put in the same amount of money and have the same percentage of ownership.

What type of legal structure would provide the best tax benifits for us i.e. partnership, LLC, S Corporation, C corporation?

Thanks!

LLC or S corp. Since liability exposure is high, you definitely want to be incorporated (home buyers can sue you many years later for all kinds of things). An LLC can opt to file taxes like a partnership. You should check what the fees are for S-corp & LLC in NJ (initial & annual). You should consult a corporate attorney for help setting up the LLC or S-corp and drafting bylaws/operating agreements.

Thanks very much for the reply.

You said "An LLC can opt to file taxes like a partnership" is that the same as pass through taxation? If so I thought LLC's by default were taxed in that manner.

So is pass through taxation better for real estate investments?

Thanks Again!

For your type of business, pass-through would likely be better. There's really no reason to pay taxes twice. All you really want is to have a corporate shield and separate liability insurance in case someone sues you for faulty repairs. Be sure you are meticulous about keeping the corporate books/actions separate from personal stuff & maintaining the corporate forms (meetings, resolutions, etc.).

The more interesting question is whether you'd report profits & expenses on Sch. C or on Sch. D. On Sch.C you write off expenses every year regardless of whether you sold the house yet. You pay employment taxes (SS & medicare) on the profit.

On Sch.D you buy the house, spend $$ fixing it, then sell it. You pay taxes on the profit. If you hold the house for 1 year, you pay long term capital gains taxes -- 20% max. If you hold it less than a year, you pay your marginal tax rate.

I'm sure the IRS has issued an opinion letter on which way you have to treat the profits & expenses. Hire a tax attorney to research & give you an opinion letter as to how you can avoid paying employment taxes on your profits.