Legal Question in Tax Law in California

Re: LLC or S Corp to hold rental properties

I am not a tax attorney, but the tax professionals I have worked with seem to favor LLCs for holding passive investments like real estate. I have not conversant on the tax reasons for doing so and I suggest a legal team that includes both an attorney and a CPA or other tax professional to fully address your questions.

I charge the same fee to form an LLC as I do to form a S Corp, so I have no incentive to steer you one way or another. In my opinion, both are equally easy to manage for a small group of investors and both are equally good at asset protection. Feel free to contact my office if you wish to discuss the matter further.

Re: LLC or S Corp to hold rental properties

You can use an LLC or S Corp to hold the rental properties, but their are some significant reasons why you might want to reconsider.

specifically, if you are deducting the passive activity losses (i.e., depreciation of the rental property), you will most likely lose the ability to take these losses except against the income from the property.

However, if the rental property is your only significant source of income, then such deductions are probably not that useful to you.

Another issue you might want to consider when choosing between an LLC or S Corp, the tax in relation to the entity. California charges a tax based on the income that LLC's and S-Corps make (entity level fee for LLCs , net income tax for S-Corps). LLC's generally pay less of this type of tax then an S-Corp if the profit is under 250,000 dollars. If you get over 250,000 dollars in income a year, S-Corps generally pay less of this type of tax then LLCs.

I wanted to elaborate a bit on the last post, but I do agree you should be looking for both a CPA and an attorney when creating the entity. MAKE SURE your attorney and your CPA are working together, otherwise they most likely will not be representing your best interests.

Hope that helps.