Legal Question in Business Law in California

I'm not sure you're doing the right thing here. Yes, you should incorporate, although your situation may require some more complex planning than what you've indicated. Typically you would want to separate out "active" operations such as contracting with assets such as rental properties. You're right to want to do something, it's dangerous to hold those types of assets in an individual capacity, and there's likely tax savings you're missing, and liabilities you are exposed to. The Section 1244 stock applies upon the sale of the stock -- unless you're specifically planning a sale of the business down the line (as opposed to sales of properties), you're probably looking at a red herring.

There are also significant tax consequences of having a C versus S corporation. And, you are betting off holding real property in an LLC.

You need to talk to a business lawyer about the details of your situation.

If you were not in California, I would advise you to form a Limited Liability Company. This would allow the deductions to pass through to you on your 1040. In fact, it sounds like you have at least two separate businesses. The first is a general contractor. The second is rental real estate. I would definitely keep the businesses separate to limit cross-liability.

For tax purposes, I would try to have you classified as a real estate professional so you could get advantage of the losses.

You need to talk to a tax lawyer right away.

I hope this helps!

Ron Cappuccio

856 665-2121

www,TaxEsq.com

I am NOT a tax expert nor do I give clients tax advice per se. However, I know just enough about the subject to have a suggestion. Don't assume that your income from your rental properties is necessarily passive. I think there is at least some possibility that the IRS would treat your rental-business income as active, rather than passive, because of the degree that you manage and participate in the business. Don't take this for 100% certain, but on the other hand, don't get discouraged about your project until you inquire!

As the other attorneys say, this is a complicated situation. Passive income is defined to include "rents." However, if you are actively managing the properties, paying for improvements, repairs, etc., this may provide what is needed. Best to consult with a tax attorney in your area for specific advice before taking any step.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney