Real Estate Professional Business Structure

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Real Estate_Professional_Business_StructureI get a lot of questions from people trying to become a real estate professional so they can take tax losses. Sometimes the circumstances make it a little sketchy. So this is an unusual (for me) question that I received. It’s the case of a real estate broker who isn’t looking for real estate write-offs.


“My wife is a RE broker and we would like to start a C Corp In IL for this activity. Then, newly hired by the new corp to do broker activity, would have the C Corp pay for my broker’s license classes, tests, and related activities. We are not interested in RE investing right now and the C Corp would not be the vehicle for that anyway. We would establish health benefits and put a MERP in place. We want to make sure that, as RE brokers the C Corp would not be considered to be a “Professional Corporation” for tax purposes. If, however, it would be a professional corporation, could we instead make our adult children stockholders and corporate officers to avoid that classification? Understanding that a C Corp can accumulate 250K or more if reason stated in minutes, we would like to take advantage of that so that, depending on the volatility of the RE market, that we would have C Corp “rainy day” money to continue with salaries, benefits, and expenses. The C Corp will be domiciled in our home. Also, as a new C Corp, would we be advised to complete the new 3115 form? We are thinking of taking nominal salaries but many bonuses as a way to not let the corp accumulate more than $50K per fiscal year to keep C Corp taxes in the low bracket. Also included would be 401K or SEP or other retirement plan that you might advise.”

There are a lot of questions included here and some of them are pretty sophisticated. My first recommendation is that you hire a qualified CPA or tax attorney to make sure you’ve got the right structure for you. If you start with the wrong structure, it can be expensive to unwind. Start right and you won’t waste money, time and energy later.

But, to answer the question with a broadbrush.

Is a C Corporation the right business structure for someone actively working in their profession? Probably not.

While a C Corporation can provide a separate tax bracket from your personal tax bracket and allow you to take some deductions like the Medical Expense Reimbursement Plan (MERP), it also some drawbacks such as:

Hard to get cash out of the C Corporation. Most of the time you’ll take cash out in the form of salary. You can also take some out in the form of tax free benefits, like you’ve mentioned. Dividends create double taxation, so that’s not recommended. And finally, the C Corporation can loan money to another entity. That’s a typical strategy if your plan is to invest in real estate.

In your case, I’d be concerned that the only way you’ll get money out will be through salary which means more payroll taxes. If you have a really big year, it’s all going to flow through to your personal tax return anyway.

Inflexible. If you have a big year, you’ve got to take the money out in salary. You can’t do a distribution like an S Corporation.

Could be considered a Personal Service Company. If the only work being done is by one person and it’s all service-related, the company may be considered the higher taxed PSC.

Those are just a few of the reasons that I’d recommend caution if you decide to move ahead with the C Corporation. I can’t tell whether it’s a good idea or not. I strongly recommend you talk to a qualified tax professional who can look directly at your own circumstances.

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