Have you just bought a piece of rental property in Charleston? It may seem like you have already done all you need to do. Many investors underestimate the importance of setting up an entity for their rentals. Even though claiming your extra income as a sole proprietor may seem like the natural thing to do, it isn’t always your best option.
Creating a business entity is more important than filing one tax return. While forming an LLC, S Corp or C Corp can be costly, it is worth the cost. These entities will improve your identity as an entrepreneur and business owner. You won’t just be another person who does real estate part-time. It may improve your position in Charleston property management.
Reasons to Establish a Real Estate Entity
The main reason for establishing a business entity for your real estate is to complete your taxes accurately. It can protect you from liability lawsuits. Even though you may need to invest a bit of your time, money, and effort, the legal protection is worth it.
Your Charleston property management company will thank you for creating the right real estate entity. It gives them an easier time with accounts. When in doubt, always get the opinion of your attorney. Ask about the different entities and establish the one that is most appropriate for your needs. An LLC is one of the most helpful entities.
Reasons to Separate Your Personal and Business Finances
Although some investors may wish to separate personal income from their business income without creating a separate entity, they may be missing out on the rewards. Having a different account for your business means you can make important business decisions before paying yourself. If, for example, you plan on making mortgage payments on your property, paying it from the business account promotes accountability. When you receive your wages, you can use them as you please.
The separation is even more important when tax time comes. You should have the assurance that you are only claiming the expenses attached to your business. Even though the main goal is to not get a tax audit, keeping your personal and business finances separate will make things easier in the event of one. You can have proof that all deductions were taken accurately.
What Is the Best Real Estate Entity for Your Rental Properties?
The best real estate entity varies depending on your needs and experience as an investor.
Limited Liability Company (LLC)
This entity is most appropriate for long-term investors. It is perfect if you are the type of investor that likes to buy and hold property. Most buy-and-hold investors aim to achieve long-term capital appreciation and rental income. Owning real estate doesn’t constitute business transactions in most states.
Real estate investors who want to flip properties and maintain other estates long-term need a minimum of one S corporation. Alternatively, you can have an LLC taxable as an S corporation. Mixing ‘buy and flip’ and ‘buy and hold’ investments in the same entity is never a good idea.
S Corporations are great for short-term investors. The entities are most appropriate for investors that mostly deal in flipping real estate. The main goal of these investors is to make a quick profit. Once the real estate has been flipped, it can be considered inventory. Investors are considered ‘dealers.’ A dealer cannot enjoy the following tax benefits:
- Depreciation deductibles
- Capital gain tax rate
- Code Section 1031 tax-free like-kind exchanges
Setting up an S corporation makes it easy for a dealer to escape self-employment/social security tax on part of their property.
Creating a limited partnership can be expensive. However, it is great when investing in a high-value estate. The entity comes with some estate planning benefits. The benefits may also apply to limited liability companies. Your attorney should help you determine if a limited partnership makes more sense than a limited liability company.
Speak With Your Attorney or Property Manager
A good attorney or your Charleston property management will help you decide the benefits of different entities in regard to your investment. From sole proprietorships to more complex business entities like an S Corp or LLC, the best choice depends on who you are as an investor.
Most lawyers and property managers will be happy to talk to you about the advantages and disadvantages of different designations.
The only disadvantage of setting up an entity is that you may have to deal with more paperwork. You may need to invest some of your time, effort, and money as well.
In exchange, however, you get peace of mind and legal protection. You can avoid most of the complexities that come with being a property owner. The right Charleston property management companies will get you through the entire process.
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