All Forum Posts by: Nur Al Sharif

Thank you all for your input! 

I have also just discovered that even in the best case, S-Corps cannot have more than 25% of their revenues come from passive streams for three years in a row; the IRS would automatically convert the entity to a C-Corp. 

@Ashish Acharya wouldn't paying SE tax (12.8% Social Security, 2.9% medicare) be worth it, due to obtaining 20% QBI deduction at certain income levels? 

I think I have narrowed down my confusion - Is the 20% QBI deduction applied to Net Income, or to Retained Earnings?

@Lance Lvovsky so I know that rental income itself isn't subject to social security tax, but here the social security tax is applied to the wages (not rental income) that I would pay myself. 

If wages earned are ultimately derived from rental income, I wouldn't be subject to social security? 

Forgot to mention - for simplicity, I just assumed the highest possible effective tax rate of 37% (applied to both the S-Corp earnings, and the salary)

Hi guys, 

I've been trying to understand the tax implications of different entity types. I've developed a really short, brief model of how an S-Corp would be taxed, provided that it is 100% comprised of rental properties. My results came out quite counterintuitive; the higher the income, the lower the effective tax rate is (I assume this is because Social Security Tax becomes more and more insignificant, as it is capped at $128,000 of salary). 

Anyway, I attached the quick model. Not sure how accurate it is, if at all. Could you please take a look and vet it? 

Thanks everyone!

Hey guys, thank you all for the responses. 

I have re-written this which may alleviate some confusion as I previously did not write it very well. See below please:

Theroetically, can my siblings and I do what this article explains: https://www.thetaxadviser.com/issues/2018/sep/leas...

What we’d be doing is lease real estate or other property to a closely held C Corporation (controlled and owned entirely by us), either as individuals or through an entity we create to facilitate this transaction.

We would lease our property at as close to a realistic FMV as possible, and our C Corp (in the case of rental property for example) would lease this out to tenants. The rental income would pass-through the C Corp to us (perhaps keeping a minimal profit for itself) as rent, thereby foregoing payroll/SE tax (that would have been paid on wages distributed from the C Corp to ourselves), and most importantly dividend distributions, since all the income would have been passed-through as rent. The C Corp would forego paying corporate tax on a significant sum since most of the revenue would have been expensed in rental payments to us. (There would also be no double taxation of sale or liquidation of said property because the C-Corp never owns or has the deed to the property).

So if everything written above is correct, we can then say that the tax obligations (on both rent income and capital gain) are the same as what it would be under the traditional alternative (simply using a pass-through entity).

If this is indeed the case, are there any benefits to be reaped from operating under a C-Corp in this manner? For example, gaining the ability to deduct health insurance, travel, entertainment, etc. while S-Corps and LLCs cannot? Any alternative benefits available to C-Corps that aren't to LLCs? 

Thank you!

@Aaron K. thanks for the response. wouldn't there be a sizable deduction for the C-Corps tax basis (because they have that large operating expense being  the lease that C-Corp pays me as an individual)? 

Or in a slightly varied scenario - the C-Corp leases the property at market rate (from individual), and then leases out the units again at market rate (implying that there would be no operating gain), wouldn't the C-Corp's tax basis be $0? 

If true, this structure would 1) provide a very similar if not identical tax obligation on operating income and 2) remove double-tax on capital gain (seeing as the C-Corp never actually owns the deed of the property)? 

Hi all, 

I came across an article detailing why a C-Corp should never own property, but should opt to lease it instead. (https://www.thetaxadviser.com/issues/2018/sep/leas...)  This led me to think of a scenario. Not sure how viable this is, or if I'm missing a vital piece of information. 

Scenario: 

I own a multi-family property as an individual (or pass-through LLC).

I lease out the entire property to my C-Corporation, receiving as low as possible (without legal violation) of a rate on it. This would be taxed at individual income tax brackets (for sake of simplicity lets assume highest tax bracket 37%).

The C-Corporation then (sub)-leases individual units to third-party renters. At this level, C-Corporation would pay a lesser tax (corporate tax rate of 21%). 

Am I missing something obvious here? If not, why don't people do this?

Thanks!

Nur

Hi all, 

I've been looking for about a week now in Los Angeles for an attorney who specializes in entity formation, with experience geared towards real estate.

We are establishing a multi-member LLC as a parent company, with separate single-member LLCs (the single member being the parent) for each property, as a subsidiary held under the parent. Of course, the main issue we seek to tackle is how to best limit the liability of the parent company - and the attorneys that we have spoken to claim that 1) "this is out of their league" or 2) are unable to provide any specific insight on the specifics of the legal structure. They are more comfortable with the single property LLC. Another potential issue is how to most efficiently structure the LLCs to gain financing, though this is likely offset through personal guarantees, which we are willing to do.

Has anyone had a good experience with a business formation attorney who has experience with the nuances of operating under a parent company? If so, could you refer me to them?

Thanks!