C-corp as a real estate professional?

Question

Can your c-corp qualify for real estate professional status?

The company is owned by two S-Corps and taxed as partnership, S-Corps owned by entrepreneurs in other endeavors and can not qualify for Real Estate Professional Status. We are in the 75 day window to change our status, have three flips going with a projected $100k profit (active income). We would really like to buy a rental all cash with proceeds, but all the taxes on the active income is around 46% after fed, state, and self employment taxes.

from IRS.gov:

Closely held corporations.

A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated.

Ashish Acharya · Answer

Your underlying tax assumptions here are not correct so these are not going to work. Please message me and schedule a call after the 9/15 tax deadline so I can clarify.

Doug Wilkes · Answer

@Ashish Acharya lol, this made my day...as you can tell I'm headed for big trouble if I don't get a plan in place.  Will call you the week of 9/19.

Greg Scott · Answer

This would be a great question for your CPA.

Based on my layman's understanding, if your C-Corp was able to achieve real estate professional status, then its active income could be offset by passive losses.  While this sounds good, that means you would need to HOLD real estate in your C-Corp, which is something you probably would not want to do if your C-corp is exposed to additional risk or liability.  Real Estate Professional does not mean that your C-Corp becomes a pass-through entity, so if you think long term, it destroys many of the benefits LLCs provide for estate planning.  In other words, when that C-Corp is eventually wound down and the assets sold, you or your heirs will pay through the nose, something that wouldn't happen if you held in an LLC.

Chris Seveney · Answer

We have a C corp for our fund. We do not do flips,and this is absolutely for your CPA but its my understanding with the C Corp is you pay corporate taxes on the profits.  The money then can sit in a retained earnings and then buy another property. The moment you go to pay yourself from the C corp you will pay taxes on it depending on your structure if its considered salary or dividends.

Right now to be honest it seems like you have too many entities and complexities.

Ashish Acharya · Answer

Doug, your question is valid but there are many gaps. Yes, C-corp can qualify as REPS. Qualifying as REPS at the C-corp level doesn't mean anything. If C-corp is not zeroed out, you can pay as much as 60% in taxes on that profit. Buying rentals with all the cash will not offset your profit earned.

Tax planning needs to be done at the individual level to avoid such taxation and there are ways. Please take this question to your tax advisor ASAP.

Doug Wilkes · Answer

Chris Seveney - thanks for sharing.  Do you hold the properties in the same C-Corp or refinance into another holding company or write a note from the C-Corp to another company for the home?  I've always heard getting the property out of a C-Corp is a pain, but if it's not it seems like the best way to keep funds in the business to fund growth.  Would you ever change the C-Corp election to an S-Corp election if the owners wanted to receive a payout?

I can't imagine what we have is too uncommon.  Both investors own other non real estate businesses.  Currently, income is paid to my S-Corp and then I pay a W2 and dividend to myself.  I was hoping to increase cash flow to my current S-Corp then run those funds through the same payroll, 401k process I have in place.

Doug Wilkes · Answer

@Ashish Acharya - if this ventures into the realm of a consult feel free to reach out and we can set up a call.

What if the strategy was flip, flip, BRRR? Using a flip LLC (C-Corp owned by two S-Corps) and a holding LLC (partnership owned by the same two S-Corps mentioned above).

C-Corp is only taxed at 21%, ownership can take a small amount of income per flip (paid as W2) leaving money in the business to grow a staff, buy software, etc.  Then leverage the tax free BRRR money to buy more rentals or flips.  When we refinance we do so into the holding company.

OR C-Corp pays nothing to the owners and uses the money to grow the business and the owners are paid out on BRRRs through the holding company partnership to their S-Corp?

Basically, we need to figure out the tax game before we can really set the vision for the company which will then guide our actions. Having the active income taxed so high really slows down the process, so an effective tax strategy to keep more money in the business is crucial to growth. Our CPAs basically said pay the tax and flip more houses, which doesn't seem like the best approach.

It will be 5 or more years before I can qualify for REPS, but my business partner should qualify next year.

C-corp as a real estate professional?

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