Going from Sole-Proprietor/Landlord to S-corp for self managing

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

9y

@Susan O. - It sounds like your S-Corp is set up just to *manage* the properties, not really own them, so you won't end up with some of the challenges normally associated with owning properties in a corporation. I'm not sure what your goals are with this structure, but I will assume that this is the best structure for your situation.

Here is how I would organize it:

1. You will still personally pay for the mortgage, HOA, property taxes, insurance and repairs out of your personal funds for the properties. These are still your personal expenses, not corporate expenses.

2. On your tax return, you will still report all of the income and expenses on Schedule E.

3. Rent will be collected by the S-Corp management company.

4. S-Corp will collect a management fee for the properties and push the balance of the rent over to your personal funds so you can pay the expenses in Item 1

5. S-Corp will then pay for mileage, telephone, office supplies, Bigger Pockets Pro Membership, meals and entertainment, advertising, etc our of the funds received for management fees.

6. S-Corp will also need to pay out your salary and payroll taxes and worker's comp insurance from these funds as well. (S-Corps are *required* to pay the officer a reasonable salary). You'll need to report and pay these income taxes either monthly or quarterly.

7. Your S-Corp will file it's own income tax return at the end of the year, issuing both a K-1 and a W-2 to you for the profits and salary paid respectively. The S-Corp should issue a 1099-MISC to you for the rents forwarded to you as well. Eventually, all of the income ends up back on your personal tax return.

2 Reply

Account Closed

Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes

9y

@Linda Weygant Thanks for chiming in. I'm way over my head on this subject so, I appreciate your input.

Quick questions:

1. What are the potential benefits that can't be achieved with an LLC?

2. Are there actually any tax savings by getting this complex compared to setting it up and maintaining the structure?

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

9y

My guess is that the OP works at property management full time or close to it and feels that she is undertaking expenses that she can't write off on her Schedule E. That's somewhat unlikely as I can't think of anything one can write off as an S-Corp that they can't write off on a Schedule E.

It's also possible that the OP really needs to show earned income for some reason, rather than passive income. This could be for child support/divorce reasons, court/criminal issues, etc. This scenario converts passive income to earned income. I am hoping the OP has a really compelling reason for that because they have essentially opened themselves up to much higher taxation (the FICA taxes on the required paycheck plus unemployment tax plus potentially the need for worker's comp coverage), so it's actually a tax increase rather than a tax savings.

But not every decision is made based solely on tax issues. Sometimes you end up with higher taxation, but you're achieving some other goal which is more important.

As an S Corp, the OP can now take the Self Employed Health Insurance write off, contribute to retirement plans and show W-2 income. She can also employ her children, contribute to retirement plans for them and structure an employee health benefit program to cover substantial medical expenses for herself and her family and use them as a business deduction. Passive income does not allow for any of that. So it really depends on her goals, her total rental income level, her other income, her spouse's income, etc as to whether this is a good plan. Could be awesome, I just have no way of knowing (and I'm not asking OP to justify it).

Susan O.

OP

Fresno, CA · Member since 2015 · 552 posts · 181 votes

9y

My problem is my current CPA I've known for 20 years but isn't as good at planning and real estate as I am. More of a book keeper but also CPA. I'd like to structure the business and organize it and still keep my current CPA

So LLC for holding.

The S Corp I have set up a holding account which collects rents and a separate account for charging myself 10% property management fees. I charge myself individually Is this normally how you would do it @Linda Weygant ?

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

9y

@Susan O. - yeah, this is perfectly acceptable. But I'm basing this off of general theory and without knowing anything about your finances or anything else, so please take it as authoritative as any other schmoo on the internet. This is an acceptable scenario, but it may not be what is actually best for you.

While I understand your desire to remain loyal to your CPA, perhaps you should find another one to help you with strategic planning. I generally prefer to do the whole package for my clients, rather than small pieces, but I know there are CPAs that will help with the strategy and work with your bookkeeper/CPA to put it into action.

Susan O.

OP

Fresno, CA · Member since 2015 · 552 posts · 181 votes

9y

Good general advice Linda. I understand it depends on my personal finances etc. Still it helps so thank you. I think you are right that a strategic planner is totally different than just punching in numbers.

I actually manage my own properties as an S-corp and own the properties in my own separately.

I have about 150 units. A lot I manage but I have handymen and some local agents help with the actual management, day-to-day.

I've been buying and holding rental property since the 1990s (about 4-10 units) and started 20-40 in the 2000s and now have 150 units. I was sole proprietor up until 2016!

So on my schedule E I didn't want to write off things like phone, computer, gas, travel etc. I did the S-corp so I can have separation between managing the properties and writing off all those extras. Because I don't hire out contractors for everything to write off on schedule E.

For instance travel I feel is capped with the schedule E, where on my S-corp taxes it is easier.

I have only had the S corp for a year so this is relatively new to me.

I pay myself minimal prop management employment then the rest of the income from rentals-expense then write off as much as possible--they're real expenses. I am planning to employ family and some local friends handymen etc. I just haven't done this yet.

Then the rest of the income I just pay to myself as an individual and it goes on the Sched E.

I want to scale this but really the S corp is for managing my own properties throughout California

You could say I'm more of the strategic planner where my CPA is more of the bookkeeper in this instance. My CPA isn't on bigger pockets haha but she is a fantastic person I trust. I'm the one on bigger pockets always learning and growing!

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

9y

Originally posted by @Susan O.:

Good general advice Linda. I understand it depends on my personal finances etc. Still it helps so thank you. I think you are right that a strategic planner is totally different than just punching in numbers.

I actually manage my own properties as an S-corp and

I have about 150 units. A lot I manage but I have handymen and some local agents help with the actual management, day-to-day.

So on my schedule E I didn't want to write off things like phone, computer, gas, travel etc. I did the S-corp so I can have separation between managing the properties and writing off all those extras. Because I don't hire out contractors for everything to write off on schedule E.

For instance travel I feel is capped with the schedule E, where on my S-corp taxes it is easier.

I have only had the S corp for a year so this is relatively new to me.

I pay myself minimal prop management employment then the rest of the income from rentals-expense then write off as much as possible--they're real expenses. I am planning to employ family and some local friends handymen etc. I just haven't done this yet.

Then the rest of the income I just pay to myself as an individual and it goes on the Sched E.

I want to scale this but really the S corp is for managing my own properties throughout california

Sounds like a great overall structure. S-Corp for 150 properties makes a whole lot more sense than for a handful.

David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

9y

@Susan O.,

My suggestion would be to consider moving your 150 properties into multiple LLCs. Decide how much equity you want to have at risk, and put properties into each LLC up to that value. Does your state have Series LLCs?

That way, should a liability issue arise, the most you should lose would only be the properties / equity in that one LLC.

Your S-Corp should be the owner of the LLCs along with a revocable trust which replaces you as an individual - your entities should be owned by each other, not any human person.

Your S-Corp can then pay you using the "salary / dividend split", usually a 1:2 ratio such that one third of your compensation is subject to payroll deductions / taxes and the remaining 2/3rds is taxed as ordinary income (no SUTA, FUTA, FICA, workman's comp., etc.).

Your tax attorney should be able to explain it. If not, I can refer you to a law firm which caters to REIs. The operating costs are a little higher; however, for asset protection it's tough to beat. Remember that all entities and properties should be properly insured, as well.

My $0.02 ...