Holding Real Property in a Corporation: How can you avoid double taxation?

Owning real estate in a corporation is an important decision and one that must be carefully considered. It can have significant tax implications, so it’s important to understand the various implications of owning real estate in a corporate structure.

When it comes to taxation, corporations pay taxes at the corporate level on any gains from the sale of property. However, shareholders paying out profits to shareholders in the form of dividends may also be subject to taxation at the individual level. This can result in double taxation – once at the corporate level and again when dividends are paid to shareholders.

When making the decision whether to own real estate in a corporation, it is important to consider the type of business structure that best fits your needs. If you are an S or C Corporation, the double taxation issue may be more significant than if you are a single-member LLC or a revocable trust. Single-member LLCs and revocable trusts may be better choices for avoiding double taxation.

The Tax Cuts and Jobs Act reduced the double taxation threat, but with our current federal debt, you face the risk that lawmakers will hike the corporate tax rates and possibly also tax dividends at higher ordinary income rates.

To avoid this threat,  we usually recommend using a single-member LLC or revocable trust to hold real property. A disregarded single-member LLC delivers super-simple tax treatment combined with corporation-like liability protection, while a revocable trust can avoid probate and save time and money.

If you are a co-owner of real property, it is advisable to set up a multi-member LLC to hold the property. The partnership taxation rules that multi-member LLCs follow have several advantages, including pass-through taxation.

In conclusion, owning real estate in a corporation can have significant tax implications and must be carefully considered. The type of corporate structure chosen depends on the individual situation, with single-member LLCs and revocable trusts being good choices for avoiding double taxation. Additionally, multi-member LLCs can deliver partnership taxation advantages. By making an informed decision regarding the ownership of real estate, individuals and businesses can ensure that they remain compliant with tax laws and minimize their tax liability.

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