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You’ve likely heard the advice to put your real estate in a corporation. Maybe you’ve even attended real estate seminars offering the same advice. Unfortunately, a lot of people believe it’s the way to go.
However, there’s one big reason you should never do this.
You’ll Likely Pay more Taxes
Here’s the number one reason not to put rental real estate in a corporation – taxes.
If you transfer appreciated real estate into a corporation, the corporation immediately has a capital gain, which is taxable. The only exception to the rule is if the person transferring the appreciated real estate has 80% or more control over the corporation.
This also works if more than one person has control of at least 80%, and both (or all) parties transfer appreciated real estate simultaneously. In this situation, you wouldn’t need to recognize the capital gain.
This doesn’t mean you won’t pay capital gains taxes, though. Instead, consider it deferred, for you’ll pay your dues when you sell the property.
You’ll also pay taxes when transferring real estate from a corporation. Not only will the corporation pay taxes on the capital gains, but the owners who receive the funds will also pay taxes at the individual level.
This isn’t the most efficient way to use your funds.
LLCs are Easier to Handle
When it comes to owning real estate, LLCs are a better option. This is because they are more flexible and don’t have the same tax consequences.
There’s no gain or loss when you transfer the property, and if you need to transfer it out, the tax consequences are much lower and based on the partnership basis.
Please contact me if you’re advised to put your real estate in a corporation. I can help you understand the long-term tax consequences of this move and how negatively it can affect your finances.
It might seem smart initially, but once you’re amid the investment or want to move it out, you’ll see how ineffective it is to put the funds in a corporation when you could save much more money in an LLC.