Can I hire my own C-corp to manage a property I personally own?

Question

Hi Everyone,

My wife and I just incorporated and are still getting everything established for the corporation.  After much research, we went with a C-corp over an S-corp. Anyway, my wife owns a home in New Mexico (we live 9 hours away in San Antonio) and uses a property management company to handle everything.  We'd like to start getting everything run through our new corp's checking account, including rental payments coming in and the mortgage payment going out.

In order to do this, do we need to establish some sort of contract between us, the owners of the home/mortgage and the corporation, which of course we are also the 100% owners? I then assume that with this document, we could get the property management company to redo their contract with the corp, instead of my wife personally.

In other words, what is the best way to transition the cash flow out of our personal accounts and into the business's?

Also, are there implications of the corp doing business out of state?  We incorporated here in Texas, and the house/property management company is in New Mexico.

Sorry for the long explanation, but we're in a bit of a unique situation for newbies.  Welcoming any and all thoughts on the matter.

Thanks!

Aaron and Trish

Brandon Hall · Answer

@Aaron Adams

There are many reasons why holding rental properties in a C-Corp is a bad idea.

The first is, as Bill Gulley mentioned, you will find yourself paying considerably more in capital gains tax when you sell properties held in a C-Corp as compared to an LLC. You will be subject to double taxation and you will be paying capital gains at the corporate rate rather than your individual capital gains rate.

If you are sued personally, a creditor can may be able to reach your shares in the corporation and take control of those shares, effectively taking control of your business. Properly structured LLCs will provide better asset protection.

If you transfer property in or out of a corporation, it is a taxable event. This is not the case for LLCs.

You must also be acutely aware of personal holding company rules since your C-Corp will be holding real estate. Your corporation may be classified as a personal holding company, and if so, undistributed income is subject to an additional 15% tax.

Property held in a corporation will not receive a step-up basis for surviving family or partners should an adverse event occur.

These are obviously not all of the issues that you can expect to deal with if you hold property in a C-Corp. I'd suggest googling "why you should never hold property in a C-Corp" for further reading.

Bill Gulley · Answer

Any entity that manages RE for the public or other owners is required to be licensed.  In some states, this is acceptable with an LLC as the taxes pass through to owners. A C-Corp does not have this pass through option and is considered a separate entity from stockholders. I'd say no, not as a manager.

You might do a master lease to the C-Corp and have it sub-let, but the C-Corp also needs to be acting within its scope of business, if it builds and sells homes, that might fly, if it sells banjos it may not be. You may have that issue with pumping non-related business income into the corporation anyway, depends on the significance.

A closely held Corp, you may have arm's length issues as to deductions taken by your Corp. See your attorney and your accountant.

Your insurance agent may need to be notified too, your Corp can take on RE management liabilities.

Holding rentals in a C-Corp can have tax issues later when you sell, advising to do so, according to Steven Hamilton II (our forum tax guy) that is considered malpractice in accounting.

Under the terms of your management agreement you can terminate the agreement and do it yourself or get another manager. :)

Luca Casc · Answer

I'm considering to set up a C-corporation to manage (arrange for repairs and maintenance. NO rental collection, showing etc) my 3 rental properties. Do I need to get a special license in order to do this in California?Thank you,Luk

Aaron Adams · Answer

@Brandon Hall and Bill Gulley

Thanks guys. Yes, we will consult an attorney and accountant. If I need to throw everything out the window that I learned growing up, that's okay.  That's why my wife and I are here, to learn.  Wish I'd found the forum before we pulled the trigger.  At this point, we can either convert to something else or simply start over. Also, I didn't realize that different intents (holding, vs rehab) might need completely different models.  Thanks, we'll be reading up a lot.

Aaron Adams · Answer

Bill Gulley

Bill,

That was a lot of info, I'm not sure I got all of that yet, but thank you! Our corp's intent/scope of business will eventually to hold and manage homes, becoming a broker and having our own Real Estate Agent (myself or my wife).  So no banjos here.

So you're saying that it would be a bad idea to funnel any rental money through the company, unless we did a master lease and sub-let it.  That would be fine, considering what we're trying to do.  I'm more concerned about operating as a foreign entity in another state.  Don't know if that's possible without that aforementioned brokers license, which will be many years in the making.

One other question, why would holding rentals in a C-corp be considered a bad practice?  If the rental property was bought (owned, not transferred) by the corp, run/managed by the corp, then eventually sold, I don't see the accounting issue?  Not an accounting expert, though, welcoming your advice.

Bill Gulley · Answer

Farming and RE are two different worlds.

As RE appreciates it increases stock value, you'll have gains on long term stock when selling. Search here on BP "C Corp Rental property" Steve Hamilton II has a few posts on the treatment.

From what you mentioned, your Corp will need to be licensed as a RE entity and directors need a license.

It's not a foreign corporation if the Corp is filed in Texas and its properties are in Texas.

I suggest you consider an LLC or Series LLC in Texas for real estate dealings.

You really need to see an attorney and an accountant. Good luck :)

Aaron Adams · Answer

For now, we are going to use it as a property management company.  Eventually, when the corporation has it's own established credit and income, the intent is buy and sell homes in it's own name.  The corporation could eventually have employees, as well.  We don't want to transfer this particular property into the corporation, just use our corp to manage it, for now.

Regarding S-corps.  We understand the potential tax advantages, but we don't want 50 mortgages on our credit history and our taxes.  We want a totally separate entity, of which we are owners, for multiple liability and credit reasons.  My family has owned a C-corp for our family farm for many years so I am pretty familiar with the legal/taxation issues involved with the C-corp.

Brandon Hall · Answer

@Aaron Adams You said after much research you decided to go with a C-Corp. Do you mind sharing the logic behind your decision? Are you holding the houses in the C-Corp or using the C-Corp as a property management company?

Just trying to gain a better understanding of your situation.

Can I hire my own C-corp to manage a property I personally own?

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