LP, S-Corp, or Other Structure: Advanced Entity Planning

Limited partnerships, S-corporations, or other structures may offer special planning opportunities but require careful tax coordination.

S-corps are rarely ideal for rental property. An S-corp can create problems that LLCs avoid. Rental losses in an S-corp may not qualify for the Real Estate Professional Status exception to passive activity rules. Distributing appreciated property out of an S-corp triggers gain recognition. And the reasonable compensation requirement for S-corp shareholders adds payroll complexity with no real benefit for a rental holding entity.

Trusts have specific rules. Revocable living trusts are common for estate planning and do not change the tax treatment of rental property during your lifetime -- they are disregarded like single-member LLCs. Irrevocable trusts, however, have their own compressed tax brackets and reach the top rate at much lower income levels, which can make them expensive to hold income-producing property in without careful distribution planning.

C-corps create double taxation. Rental income in a C-corp is taxed at the corporate rate, and any distributions to you are taxed again as dividends. There is almost never a reason to hold rental real estate in a C-corp.

The pitfall: If you are in a non-LLC entity and are not sure why, your CPA should evaluate whether restructuring makes sense. The costs of being in the wrong entity type compound every year through lost deductions, unnecessary taxes, or both.