Resource for Corporate Structure Advice

[Daniel B.]

Hi all, my partner and I plan to grow our current portfolio of 5 units to roughly 25 units over the next 5 years and would like to figure out what the best structure would be to hold the properties from both a liabilty and tax filing perspective. I've read through a number of posts in this subforum but there doesn't seem to be the kind of consensus on the best approach that exists with LLCs in the states. As such, we would like to consult with a professional who can guide us in the right direction.

Can anyone recommend a good accountant/lawyer who is well versed in the area of real estate investment (more specifically the buy rent and hold model)?

[Kate H.]

I have been agonizing over ownership structure for past week because I want to buy soon and have seen properties I'm interested in, but I need to decide whether to form a corporation and form one before I buy the property if I will have my corporation hold it, and I am very concerned about legal liability as well as overly onerous and/or expensive tax obligations. 

I have read about a 3 tier corporate structure described in a few places:

http://mpgroupcpa.com/post/3-tier-corporate-struct...

http://www.businessgrowthstrategies.ca/2425/how-to...

The idea is to own each property through its own corporation (the "real estate companies"), have a management corporation that manages the properties (the "management company"), and have all these corporations 100% owned by a holding company (the "holding company"), which is owned by one or more individual investors. The real estate companies hire the management company, which collects rents and pays for repairs, maintenance, etc., takes a property management commission, and gives the rest to the real estate companies. The real estate companies pay dividends to the holding company as needed.

I think this setup could work well for people with multiple properties and multiple investors. It should provide good liability protection, and the management company could qualify for the 15.5% rate for active businesses. However, it does sound like a lot of work to set up and a lot of accounting to handle day to day, especially for those of us who have fewer properties, as well as the double taxation inherent in any corporation setup. There could be a lot of double taxation when the properties are sold, when the corporation pays on the capital gains and then distributes the proceeds as dividends to the investors. I have also read about structuring sales as sale of the stock of the real estate company, but it might be difficult to find a buyer who would be willing to buy corporate stock of a corporation owning the property rather than buying the property itself.