Can I acquire multi-family property through my S corp?

Question

hey guys -- here's one:

- I live in a multi unit property (4 units) and would love to make an offer to acquire it from my landlord / owner

- I have a single owner S Corp that does well, I pay myself a reasonable W2 salary with, but not likely impressive enough to qualify for the appropriate mortgage necessary

- Imagine needing ~$6M for the acquisition -- plan to keep one unit as short term rental, convert one unit to office for S Corp and combine the other two to become my primary dwelling

- I can put together ~$2M cash as downpayment -- but could the S Corp be the entity to acquire this property?

- Thinking is: low 7 figure gross revenue from S Corp looks better than low six figure salary I pay myself, Using one of the units as S Corp office could unlock some tax benefits, Using the 4th as a short term rental (under the S-corp) could unlock even more

So: Can I acquire property via S-Corp and is this a benefit or add unnecessary complexity because of the past-through structure of corp?

Thank you!

David M. · Answer

@Victor Solomon

Usually not recommended to hold title to a property in a S Corp.  The "corp-like" structure gets into the way so it can be financially/tax disadvantageous.

Also, usually recommnded to not mix business lines within legal entities.  You are mixing your risks.

You really need to see what sort of financing you really need, and how to get it.  Meanwhile, the salary plus the distribution from the S Corp should form the basis of your income anyway...  Gross revenue shouldn't help...

Bruce Woodruff · Answer

I was always advised by counsel (in California) to hold my Construction companies in an S Corp and my properties in an LLC. I forget the exact reasons, but hey, they're the attorneys, I'm just a glorified carpenter....

Bill B. · Answer

1) $6 million for a fourplex? OUCH. 2) if you put down $2 million and borrow $4m at the incredibly reasonable 6%. Your payment is $24k/mo plus taxes/insuramce? How does that make sense?

3) I THINK you give up a bunch of benefits in CA by owning it outside of your personal name. BUT, that might only apply if you’re living there. (Easier to evict/raise rents, etc.) but that’s all internet whispers, research it more.

4) your $2m has to earn $110k ($9k/mo) just to break even with a guaranteed bank CD. Let’s pretend insurance and taxes are only $2k/mo. That means you need $35k/mo in rent to break even with the bank. Do these rent for $9k/mo each with no vacancy, PM, repairs? That’s a big lift. (Ok, so maybe $3k of that payment goes towards principle and they only have to rent for $8,250/mo. If you get a 6% loan, self manage, everyone pays, nothing breaks, and no one leaves.}

Ps. Sorry, I just read you live in one. So take $32k minus rent saved and divide the remainder by 3. That’s how much rent you have to charge the other 3. I don’t know in CA if you can raise their rents, if you can evict, and how much you have to pay them to leave.)

Jon Schwartz · Answer

Hi! Current S-Corp'er and former C-Corp'er here!

Your S-Corp isn't a separate entity, so I don't think it qualifies any better for financing that you individually.

And because it isn't a separate entity, I'm pretty sure you'll get the same tax benefits whether you own the building on your corp.

I have two suggestions for you:

- Ask you CPA, not us bunch of idiots!

- Investigate buying the building with a commercial loan. Then the building gets underwritten, not you. If you have a 33% down payment, you may be able to put a commercial loan on it. Though it's a residential property, many commercial lenders in LA will offer commercial financing on a 4-plex of that value.

Good luck!

Jon

Shafi Noss · Answer

My be because LLC's pay self employment tax and S-Corps can avoid that in a way that can be taxed less.

Account Closed · Answer

I would strongly recommend creating a separate LLC for the property. There are varying levels of asset protection:

Worst:

–  No coverage, held in your name.

Bad:

• Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

Good:

• Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

Better:

• Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

Best:

• Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

• Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
• Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
• Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

Basit Siddiqi · Answer

It is not adviseable to hold appreciating property, such as real estate, inside of an S-Corp.

Nate Meeker · Answer

@Victor Solomon - I second what @Katie Balatbat said.Without knowing all of the facts, If you can do it outside of an S-Corp, it is typically better.

Katie Balatbat · Answer

@Victor Solomon

You may want to focus and prioritize other concerns than just the loan (though understandably without the loan, the whole deal may fall through).  You may want to think about what combining personal use assets with business use assets does to put the assets in the entity - as well as your personal assets - at risk.  You also may want to think about the tax consequences of an S-corporation, including the tax treatment upon sale or distribution of the real property from the corporate structure.  Given that an S-corp is a pass-through entity, you may want to closely look at what return the income is reported from the business in the first place.  If you need referrals for any professionals in the San Diego area, feel free to send me a message.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Crystal Smith · Answer

My first recommendation is to talk to a CPA that specializes in Real Estate.  Now that I've made that recommendation here's what I would do.  I'd start a separate LLC to acquire the property so my businesses will be separate.  I'd then rent to my S-Corp and have payments for the STR made to the new entity.

With that said, based on your comment that the income you receive from the S-Corp is not enough to qualify for a traditional mortgage, you may have to consider other ways to acquire the property such as owner financing or lease option.  Find out the owner's motivation for selling after which you can develop a plan.

Can I acquire multi-family property through my S corp?

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