(drum roll, please!)
10. IRS DEALER STATUS. If you buy and flip properties, you may be considered a "dealer" (rather than an "investor") by the IRS. Dealers cannot defer paying income taxes on installment sales. Dealers must pay self-employment taxes on all gains. Dealers cannot depreciate property. If you also have rental properties, the IRS can reclassify ALL of your properties as dealer properties and hit you with a big tax bill. If you use a corporation to buy and flip, and another entity (such as a limited liability company) to hold your long term rental properties, you avoid the risk of this reclassification.
9. PORTABILITY. Real estate cannot get up and walk away. If a corporation owns your real estate, it can be moved easily, since the corporate stock can be transferred. If your real estate is owned in a corporation or other entity that has transferrable ownership, the ownership goes where you go. This is important in estate planning. If you own real estate in more than one state, your heirs must go through probate proceedings in each state. By converting the real estate into personal property (stock certificates), there will only be a need for probate in the state in which you die.
8. PRIVACY. A corporation gives you privacy from prying eyes. It also gives you a buffer zone from your tenants. You don't want your tenants to know you are the owner. You are at a distinct negotiating disadvantage when you are the "greedy landlord." Instead, you should represent that you are an employee of the management corporation. That way, you are just the "go between."
7. PRESTIGE. Let's face it, folks, a corporate entity just looks better. People will think you are more savvy if you are "North American Realty, Inc" rather than "John Smith Realty."
6. INCOME SPLITTING. If you operate as a sole proprietor, you are taxed on all profits you make, even if you reinvest the money into the business. A "C" corporation is a separate taxpayer from you. The corporation pays its own tax, but usually at a lower rate than you pay ("C" corporation tax is only 15% up to $50,000). If you take a small salary and leave the rest of the profit in your corporation, you can effectively reduce your overall income tax.
5. TAX SAVINGS. A corporation is an excellent device to turn nondeductible expenses into deductible expenses. For example, the old "home office" is a trap for small business people who try to claim the expense on their personal tax return. However, if your corporation leased the same space from your home, you reduce the risk of being audited for the same deduction.
4. FRINGE BENEFITS. You probably already know that items such as health insurance, medical costs and life insurance are not fully deductible as an individual. Did you know, however, if you set up a "C" corporation, you can deduct 100% of your medical insurance, medical expenses and up to $50,000 of term life insurance?
3. EASIER TO SELL THE BUSINESS. If your real estate investing business is in your name, you can't sell it to another individual, or business. You can't sell a company if the business relies primarily on you. You need to set up an entity, separate from you, with its own books, and credit history, that can be sold as an ongoing business.
2. LESS RISK OF IRS AUDIT. If you are a property manager, broker or anyone else who reports income on a "Schedule C," you are a high risk for an IRS audit. Schedule C Small businesses are audited much more often than small corporations. By incorporating, you can reduce your risk of an audit by as much as 300%.
1. PROTECT YOURSELF FROM LAWSUITS. When doing business in your own name, you are risking everything you own. Incorporating will separate your business from your personal assets. If you have a lawsuit against your business, a real estate deal that goes bad, or a liability you can't pay, a law suit can only touch the assets held by the incorporation. You can't be touched personally.
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