Hi again Diana,
There are significant difficulties in owning real estate in an S corp that aren't readily apparent. We'll touch on them first, along with some sites that support and expand on the following:
S corporations have to distribute profits based on ownership. Salaries or management fees can be used to divert some earnings, but ownership dictates who gets the taxable income
or loss. Partnerships can allocate income
any way they agree to.
S corp shareholders
can only deduct losses up to their basis or at risk limitation
, which generally does not include mortgage indebtedness. Partners can deduct more, since they are personally liable.
Long term real estate holding is the greatest wealth builder I know of. As a property
grows in value, it can be refinanced, and the value distributed to its owners. S corp shareholders are taxed on distributions
in excess of their basis as capital gains
. Partners do not feel this pain.
Transfers in of debt free property are not tax free with an S corp if the contributing partner is not in control immediately after transfer (see 351). This makes transfers between a monied shareholder and an active owner difficult. Partnerships do not have this limitation on control.
S corporations have restrictive domestic owner limitations, while partnership interests
can be held by essentially any party or entity, even international.
I promised some sources for the information as well. http://rpwcpa.wordpress.com/2011/07/15/bob’s-top-10-reasons-to-not-own-real-estate-in-an-s-corporation/ was a source for much of the S corp side of things. The 351 rules
I knew, and added for support.
I can add a few things on the partnership side as well. The basic structure of general partnerships includes joint and several liability, which means that you put yourself at risk for the actions and claims against other partners. I liken it to marriage without nights in front of a fireplace. A lot of sleepless nights when you find out your partner is getting divorced, gambles, lost his job, etc.
partnerships are the standard entity for real estate investment as partners. Limited owners engage a general partner to manage things. An s corp can not have two classes of ownership.
many people are tempted to own rental real estate as partners without the formality of partnership formation. Tenancy in common, joint tenancy, rights of survivorship are all quasi-partnership titling options that have some, and sometimes more, of the partnership complications mentioned before. These real estate holdings are often informally done, and the sale/refinance/recapitalization/.management issues can be overwhelming.
There are similar entity issues in refinancing, selling one's interest, cashing out, additional calls for capital, etc. that are too similar to address here. Most partnership agreements or shareholder agreements should spell these issues out.
http://www.investopedia.com/articles/mortgages-real-estate/08/title-ownership-property.asp was the article reviewed for the titling issue.
Hope that gives you some guidance. Thanks for asking for me, and thanks from Just Answer.