A Case for Placing your Property under a Corporation

Many prominent personalities in the rental sector have written against using companies for your rentals. However, it is important to take all information one comes across with a pinch of salt. While some such information may be factually correct and come from authentic sources, it is never guaranteed to be accurate for every situation. Different circumstances and situations call for different outlooks and different decisions and sets of actions in response. Therefore, different positions concerning an issue are always inspired by different things and are often biased to an individual’s personal experience. It is important for one to seek to get a feel of the different sides of an issue before making their decisions or taking actions.

For example, concerning placing rentals under a corporation, one must consider all the positions on this matter before making a decision or taking action. One would be surprised, despite the abundance of information against the practice; one would be surprised to find that there are quite some advantages that come with the practice. There are many occasions at which placing your rental property under a corporation is the most prudent thing to do, the main question should be which kind of company to put the assets under.

As you grow older and develop your career further, your income increases gradually. As your income grows, you find yourself in higher tax brackets slowly. If you go on and invest in a rental property, you become liable to pay even more tax as your sources of income to avoid paying such high taxes as a result of your investment; it would be most prudent to place your property under a C-corporation as it would shield you from your tax liabilities. C-corporations have a 15% marginal tax rate for any profit that does not exceed $50,000. Thus, if your rental income draws a tax liability that exceeds 15%, it would be of benefit to consider placing your property under a c-corporation. The one downside to using a C-corporation, however, is that one cannot retake control of their property without causing the entire corporation to be taxed. The IRS considers removing property from such a business as a sale which is liable to tax.

At other times, it is more prudent to sell the property to an S-corporation. This is most effective when one wishes to use the Section 121 Exclusion. This is a $250,000 exclusion of the taxation on one’s capital from their property if they are single or $500,000 if they are married. This exclusion, however, only works if one lives in a property for two years, and rents it out for three, giving them a maximum of five years on the property. However, if they wish to hold on to the property for a period longer than five years and still qualify for the Section 121 Exclusion, the S-corporation option becomes the most viable. The trick is to instigate a sale of the property to an S-corporation that you own. By inducing a sale, you have effectively qualified for the Section 121 Exclusion and therefore have no tax obligations whatsoever. The good part is that you have virtually sold the property to yourself and paid no taxes. You can, therefore, hold to the property for as long as you like.

Better still, the S-corporation will receive a stepped up basis, meaning that should it (you) ever decide to sell the property, you still pay very little tax off it. It genius!