What’s The Best Corporate Entity To Use In Real Estate Transactions

Performance Property Real Estate Question

Q: Gerald, what is the best corporate entity to use for real estate transactions? Edward, Hillside, NJ

A:  The most appropriate corporate entity to use in a real estate transaction depends on what real estate transaction you’re doing.  It also depends on your capital requirements, your time horizon, whether you’re doing the transaction by yourself or with partners.  If you are doing a real estate deal with partners, the ideal entity may depend on the number of partners you have or need to get the deal done.

Here are some facts on 2 often used entities in real estate transactions: S Corps &  LLCs

S Corporations are my least favorite entity for several reasons including the fact that termination of an S-corp status freezes the deductibility of unused carryover losses to the extent of the shareholder basis.  Basis is what makes LLCs superior to an S Corp. because for an S Corp you have to have a positive capital balance in order to write off losses–there is no sure requirement for LLCs.

An S-corp can have only one class of stock ownership.   S-corporations cannot have IRA’s, corporations, partnerships and non-resident aliens as shareholders.

S Corporations are generally more expensive to form than an LLC and can have no more than 100 shareholders, which may limit the amount of capital you can raise.   

LLCs on the other hand are not as restrictive as S corporations, they are relatively easy and inexpensive to form and can be used as a separate entity or as a pass-through for tax purposes. 

So, what is the best corporate entity to use in a real estate transaction? The answer is that it depends.   You have to get into the details of the transaction to determine the ideal entity to use.

Thanks for your question, Edward.

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