Incorporating - Posted by Laure

Posted by JHyre in Ohio on March 17, 1999 at 11:05:16:


Assuming that there is no better option or way to placate the bank, you can form a sub corp to hold the properties. Dividends get passed through to mother corp almost tax free and the property is “separate”. If corps are expensive in your state (IL tax authorities and legislature are not very congenial) it may not be worth the hassle. NOTE: You can also hold the properties in the corp but create internal firewalls (“divisions”, corporate by-laws, etc.) making very clear that the properties are for investment, NOT sale. While it’s easier to show seperate business if assets are in different entities, such a split is not mandatory. Of course, the rents are now subject to double-tax in lieu of necessary amount of deductions to offset.

Is banker hip to seperate LLC holding properties & guaranteeing corporate debt? How about lending to LLC and then it contributes cash to corp for ownership OR makes a loan to the corp with bank proceeds? This avoids separation and double-tax issues- best of both worlds.

John Hyre

Incorporating - Posted by Laure

Posted by Laure on March 16, 1999 at 08:15:51:

So, now I have the CPA and the Tax Attorney arguing with me that I DON’T want a c corp. To me, it seems clear that I DO !!! I have an appointment Wednesday to discuss it with my new Tax Attorney… he is hxll bent on keeping me out of a corporation. Says “none of my other re investors are in c corporations”… Like I really care what everyone else is doing !!

My CPA disagreeing, I understand. My history has been a “buy and hold” strategy. However, I can’t see how I won’t win with C Corp. I am getting sick and tired of 1031 exchanges, and they are starting to restrict my expansion.

Their main arguments: “Can’t pass real estate to children”… but I CAN pass Corporate Stock every year !
“Double Taxation” But isn’t 15% tax on a flip better than 28% ?? I will pay 28%+15%(ss tax) on all payroll taken from the corp. Can’t I take dividends? They are not subject to ss tax. “Once a property is in the Corporation, you can’t get it out” You mean, I can’t sell a property any time I want?

COMMENTS?? My main concern IS tax management. Their suggestion is to form a LLC instead, but the first time I asked my CPA about LLCs he said they were cost prohibitive in Illinois… GEEEZZZZ !!! The other advantage of a corp is my IRA can be contributed to, and that IRA money can go into real estate and grow tax free !


Laure :slight_smile:

Re: Incorporating - Posted by Matthew Chan

Posted by Matthew Chan on March 19, 1999 at 24:14:16:

I am not sure if this is the the type of reply you would like but I have found that CPA’s are too focused on micromanagement without seeing the larger picture. I am certainly not an expert in tax but I can certainly tell you who I will follow: people who have done deals and made it. Not some guy locked away in his office who isn’t making any more than I am.

If businesses were run the way accountants wanted it to, businesses would hardly expand and innovations wouldn’t be made. I’ve seen quite a few financial planners fit into this mold. Basically, save your way until you are dead.

My current CPA thinks I am nuts regarding doing real estate. He thinks I intend to go into rentals and get deals with negative cash flow so I can get tax benefits since his other clients do that. He keeps beating on me about the dealership status if I flip properties.

So I am thinking to myself, he is recommending I should NOT go out and do anything so I won’t have to pay any additional taxes. I am thinking I would be HAPPY to have such problems.

So there is definitely a different mentality going on here. You may want a 2nd opinion or simply go with your gut feeling. If I am to be wrong, I would rather be wrong doing it my way than having someone being wrong for me.

Good luck.

Re: Incorporating - Posted by Rob FL

Posted by Rob FL on March 16, 1999 at 18:39:24:

My accountant says that you have to take some salary and cannot make it all dividends. If you don’t take the salary the IRS could come back and IMPUTE it and force you to take it anyway plus penalties.

Re: Incorporating - Posted by raelynn mitchell

Posted by raelynn mitchell on March 16, 1999 at 09:55:47:

According to my registered agent who assisted me, trained me, and taught me most of what I know about corporations, the number one reason why most CPAs like S-Corps and LLCs is the flow through. Which basically means they file ONE tax return, your personal, and they’re done. A lot less PAPERWORK.

Never MIND that there’s more $$$'s in the more paperwork (dollars you get to KEEP, I mean).

Food for thought:

What happens if a C-Corp borrowed every dime it invested? It shows a profit at the end of the year, pay back the loans (prior to year-end closing).

Corporations are taxed on PROFIT, not income (like us walking, talking, breathing bodies). Figure out creative yet legal ways to SPEND THE MONEY out of the corporation before the end of the year, and you don’t HAVE any profit (yet you have everything you need to have). 15% of zero still gives the IRS nothing at all. Can’t spend it all? I bet you can get very close.

Re: Incorporating - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 16, 1999 at 08:20:32:


E-mail me privately with your phone number & we’ll chat.

John Hyre

Not exactly - Posted by Kev (NC)

Posted by Kev (NC) on March 16, 1999 at 21:48:37:

Two comments:

  1. The papework argument only holds water for the LLC (as a single member LLC can be diregarded for tax purposes and the income can be reported on you Sch-E instead of the 1065 unless there is a check-the-box exception). However the same is not true for an S-Corp. An 1120S must be filed.

  2. Paying off debt at year-end will NOT reduce taxable income (principal is not deductible - only interest is). Refresh your registered agent’s memory if he/she told you otherwise.

A few rules of thumb: If dealer status is an issue - use a corp rather than an LLC (avoid SE tax). If you will retain profit money in the corp use the C-corp to take advantage of the lower corp rates. If you will pay out the profits use the S-Corp to avoid double taxation.

I personally hold my properties for a year or longer so I use an LLC.

Hope this helps.

Re: Incorporating - Posted by JPiper

Posted by JPiper on March 16, 1999 at 17:00:10:

Hi Raelynn:

It was nice to see you again in Dallas.

Just thought I’d make one comment. A C-corp that borrows all it’s investment funds, makes a profit, and then pays back the loans at year end will not reduce it’s taxes. Paying back the principal amount of a loan is not a tax-deductible expense.


Re: Incorporating - Posted by Carol

Posted by Carol on March 16, 1999 at 14:47:50:

Go girl!
Estrogen rules. Sincerely, a nice response to a really challenging situation. I HATE having to talk with CPA’s and Attys. Seems they are always fighting me.

I had some referrals from the site (thanks everyone) but still had to go in an ‘argue’ my point. Frustrating and time consuming.

Anyway, thanks for your comtributions!

Re: Incorporating - Posted by Laure

Posted by Laure on March 17, 1999 at 06:37:17:

My banker wants me to put some property I am going to keep into the corp so he can give me a line of credit against them and not have to keep writing new mortgages every month. So, if I need to keep my rentals separate, what do I do now? I think putting a few free and clear rentals into the corp is going to be necessary. He wants the clean collateral.

Laure :slight_smile:

Re: Incorporating - Posted by johnman

Posted by johnman on March 16, 1999 at 17:47:01:

Hey JPiper,

How are you dude? Would you do me a favor and read my post below regarding transferring property into a corporation. I need to incorporate. I didn’t know that there are lots of disadvantages of being a sole proprietor.

Thanks man,