How to form an S-corporation for Real Estate

Introduction

If you’re looking to grow your real estate business, S corporations can be a great option.  They have distinct tax advantages that can help you maximize profits. But if you’re not sure how to form an S corporation for real estate and convert your existing business into one, don’t worry—we’ve got everything you need to know right here!

Why turn your real estate business into an S-corporation?

S-corporation status can be a big advantage for real estate investors, who often have to pay income tax on their personal returns. If you’re operating as an S-corporation and make money from your rental properties, the profits will be passed through to shareholders and taxed at their respective tax rates. This means that you won’t have to pay taxes twice: once at the corporate level, and again on your personal return.

In addition, since there are limits on how much active income (i.e., money earned from working) can be taken out by owners of an S-corporation without triggering additional taxes or penalties, turning your business into one gives you more control over how much tax liability you face each year.

Is your real estate business a good candidate for an S-corporation?

If you are considering converting your real estate business to an S-corporation, it’s important to make sure that your business will be a good candidate for this type of conversion. The following factors may help you determine whether your real estate business is a good candidate for an S-corporation:

• Is there more than one owner? If there is only one owner of the real estate business, then no additional shareholders can be added without decreasing the value of their personal assets due to tax liability.
• Is it possible that sales might increase in the future? The higher sales volume translates into higher profits and therefore higher taxes. If there is any chance sales might increase in value over time, it makes sense to form an S-corporation now while they’re still low rather than waiting until after they’ve increased substantially and paying off those taxes later on down the road when prices may have already leveled off once again.

How to convert your real estate business to an S corporation

The first step in forming your S corporation is to file Form 2553, Election by a Small Business Corporation. In addition to this form, you will also need to file a second form called Form 2553-EZ, Short Form Election by a Small Business Corporation.

Once you have filed documents with the IRS and received approval from them, then you can begin operating as an S corporation. You may also be required to file additional forms after receiving approval from the IRS so that they can keep track of your business activities going forward.

Step 1: Form a corporation

You’ll want to form an S-corporation for real estate investing if you intend to use your company as a vehicle for buying and selling properties, making it easier for you to manage your investments. To get started with this process, first, choose the name of your corporation. You can choose any name that isn’t already in use by another business entity or trademarked by someone else; however, keep in mind that it may be difficult or impossible to register certain words as trademarks or service marks if they are part of the name of your corporation.

Step 2: Elect to be taxed as an S corporation

You must file form 2553 to elect to be taxed as an S corporation. Form 2553 is due by the 15th day of the third month after the beginning of the tax year. Form 2553 is not required if you are already taxed as an S corporation.

Step 3: File tax returns and start paying yourself a reasonable salary

As an owner of an S-corporation, it’s important to understand that your income from the business is taxable. So if you want to avoid paying taxes on all of your profits, you’ll need to pay yourself a reasonable salary so that at least some of them are taxed at ordinary rates instead of being taxed at the higher capital gains rate.

S corporations have distinct tax advantages that can help you maximize profits

Unlike sole proprietors, LLCs and partnerships, S corporation income is taxed at the shareholder level. This means your business can be structured to save you money on self-employment taxes and health insurance premiums.

S corporations also allow you to take advantage of lower tax rates by deducting 100% of your business expenses from your personal income, which may help offset some additional costs related to running a small business.

Conclusion

While the process of converting to an S corporation can seem daunting, it’s actually not difficult. The key is to make sure that your real estate business is a good candidate for the switch in the first place and then follow the steps outlined above. If you do that, you’ll be on your way to enjoying all of the benefits of being an S-corporation while also keeping up with any updates that may come along with this conversion.