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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 12035
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I live in Texas and am a high wage earner from my employeer,

Customer Question

I live in Texas and am a high wage earner from my employeer, I recently purchased realestate whose profits I would like to shield from my high taxation rate. I don't plan on issuing stock, or paying myself a wage from these earnings. However I DO plan on acquiring more rental income, and I would like the ability to open credit cards under this entity.
Question is: What incorporation vehicle would be best to do this and why?
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.
I'd recommend the LLC.
The LLC is one of (if not The) fastest growing entities out there, because it provides the corporate liability of the corporation with the flexibility of the Sole-proprietorship/partnership (depending on the umber of owners).
A limited liability company, (LLC), requires the least amount of paperwork and lowest fees to register and is well-suited for small businesses, especially single-owner ventures like real estate investments, because (the LLC doesn't file a separate return lets you get the lower long-term capital gains rate that individuals enjoy, but again, provide the liability protection that's so important in business.
If you use the S-Corp you have to set up payroll, pay yourself a salary, do quarterly payroll tax returns pay in payroll (FICA) taxes at least monthly, do an annual payroll tax return AND get not tax advantage until you are profitable enough (over and ABOVE the salary and other expenses) that there may be some Self Employment tax savings.
Pluses and minuses of the C-Corp (from an excellent article by the lawyers at Chron:
Shareholders in a C-corp face potential double-taxation, as the corporation has to pay taxes on its profits, which are taxed again when shareholders receive distributions of these profits and have to report them as income. Because of this, real estate investors often choose to be taxed like an LLC or S-corp. However, the Bigger Pockets real estate blog cautions that while there are some taxes to be saved with an S-corp, it also comes with more IRS scrutiny and can make an audit more likely. Also, it can be easier for a C-corp to qualify for bank financing, because the individual's credit history isn't reviewed, like it would be with an S-corp.
Bot***** *****ne? .. Since the LLC can choose at any time to elect S-Corp taxation (IRS form 2553) OR C-Corp taxation (IRS form 8832) the LLC is then place to start.
... and many real estate investors .. because of the combination of flexibility and liability protection, choose to stay there.
Let me know if you have questions...
Customer: replied 2 years ago.
Hello Lane,But again, how to keep the profits from this venture taxed at a different tax bracket than my already high 35%?For LLCs aren't the net earning taxed pass-through tof you personal income tax? In other words, if my personal income tax is 35% then wouldn't theses earnings be taxed at that high rate?
Expert:  Lane replied 2 years ago.
That's right.
That's true with ANY tax passthrough; sole proprietorship, partnership, LLC, S-corp.
Only the C-corp ( and the IRREvocable trust) are taxed at Corporate tax brackets and rates (and trust brackets and rates) respectively.
He problem with the irrevocable trust is that the brackets are SO LOW. (Same income levels taxed at MUCh higher rates - trusts hit the 39.6% rate at $12,300)
And the problem with C-Corps, again, is that double taxation; Once the corporation pays tax at corporate rates... if money (that's left after being taxed to the corporation) is then paid out to the shareholder (owner) as a dividend, then then individual pays tax on that same dollar again, on the personal 1040.
that the LLC makes sense for real estate is a fairly common belief among tax professionals (I don't mean tax preparers but rather tax attorneys and others who do tax PLANNING).
Here's an excellent article on how the answer cha nges depending on the end in mind: