Never Hold Real Estate In A C Corporation

Or: Fire the professional who even suggests such a thing. One of the cardinal sins of real estate asset protection is to take title in the name of a C corporation. While there are certainly advantages to using a C corporation in business (which are discussed in my Rich Dad’s Advisor book Own Your Own Corporation) there is a huge disadvantage to using a C corporation for real es­tate, which can he expressed in one word: taxes.

As you probably know, C corporations face a double tax. You pay taxes once at the company level and then again when dividends are distributed to share­holders. With an S corporation, LLC, or LP you pay tax only once at the com­pany level. A chart graphically illustrates the difference between double taxation and flow-throcorporation 01ugh taxation.

So what happens when you have a capital gain on the sale of real estate held by a C corporation? You pay a lot more in taxes. Consider the situation in which a $500,000 long-term capital gain is realized on the sale of real estate held for longer than one year.

you will pay $144,500 more in federal taxes by using a C corporation instead of an LLC. Does Uncle Sam want you to use a C corporation?. Will any investors join your deal if you propose using a C corporation? They’ll know you don’t know what you are do­ing. Avoid the professional who advises you to use a C corporation to hold any interest in real estate. They just don’t know what they are doing—to your later detriment.

We frequently have clients discuss how some asset protection “guru” or other promoter advised them to set up their structure as coropation 02follows:

The rationale is that the two pieces of rental property are owned by the LLCs and each LLC is in turn owned by a C corporation. The gurus will state that all kinds of deductions can be taken with a C corporation. The problem is that, as flow-through entities, the profits flow from the LLCs to a double tax C corpo­ration. You are still in a bad tax position.

If you are intent on using a C corporation in your entity mix (and please be cautious of promoters who overly tcoraption 02out the supposed glorious benefits of the C Corporation) a better scenario is the following:

In the structure above, the title-holding LLCs are held by an asset protecting Wyoming or Nevada LLC, thus providing flow-through taxation throughout the structure. For those desiring the write-offs of a C corporation, a manage­ment C corporation is used. Each title-holding LLC pays a management fee to the corporation so their benefits are obtained. But there is no ownership of real estate through the C corporation, thus avoiding the double taxation of profits we had in the first instance.corporation 04

Please also beware of promoters who would have you set up more entities than you need. The management corporation may provide some benefits in later years when there is plenty of cash flow. But at the start, do you really need one? So be very cautious of those promoters who want what is in their best interest and not yours.

Never Hold Real Estate In A C Corporation
5 (100%) 4 votes