Ok, I'm probably waaaaay off here, but bear with me....Say I form a real estate holding corporation, which would earn income from rents paid by the tenants and capital gains from sales of properties and stock investments. (Sounds great so far, right?)I've been researching and learned that you can either set up the corporation as a flow-through entity, where the owner would declare the corporation's income as her own on her taxes, or set it up where the the corporation has its own tax return and the owner is taxed on income dispersed. (I've probably already messed this up! :)My question is this: It seems that if it's set up as a flow-through, you're only taxed once on the capital gains/ income, whereas if the corporation does its own taxes, it pays on the capital gains and then I would also get taxed on the income that I dispersed to myself as owner. Is this right??Also, as a flow-through entity, would I still be able to take all of the normal and reasonable tax deductions on the business expenses?Any direction would be helpful and any links or book titles would be fantastic!Thanks,K
Say I form a real estate holding corporation, which would earn income from rents paid by the tenants and capital gains from sales of properties and stock investments. (Sounds great so far, right?)Actually, no, it doesn't sound great. Corporations do not benefit from the lower long term capital gains tax rates as do individuals. All corporate income, capital gains or ordinary, is taxed at the normal corporate tax rates. Additionally, personal holding companies are subject to a much higher tax rate even as a corporation. There have been a number of threads on this subject or variations thereof in the past you should search for. And don't do anything until you have talked to a knowledgable accountant and attorney about what exactly you are trying to achieve.would I still be able to take all of the normal and reasonable tax deductions on the business expenses?The corporation would be able to, not you. A corporation is a separate legal entity from you and it's business expenses are its own.
Yes a corporation can elect to be tax as a flow through entity. Its called an S corp election. Get the instructions to IRS Form 1120S. Then any capital gains would be taxed at your capital gains rate. Its a little complicated and time consuming, for most investors in real estate and stocks it is probably not worth the effort, but it might be just what you are looking for.Good Luck,eg
A corporation is a seperate legal entity, as a prior response stated.However, a corporation can elect to be an "S Corp" for income tax purposes. When this election is made, the coporation completes a tax return that includes a schedule K. The shareholders then include the schedule K items on their tax returns--the corporation *ordinarily* does not pay income taxes.If the corporation is allowed to be a normal "C Corp," the corporation does pay its own income taxes. Distributions to owners are then usually dividends, taxable to the owners.But, it is very likely, in your scenario, that the corporation would be classified as a personal holding company due to heavy investments in passive activities. This would NOT be good as such entities are taxed at very high rates and do not enjoy the lower tax brackets. Additionally, there is no lower capital gain tax rate for C Corp's.The "S Corp" scenario can get more complicated than described above, particularly if the "S Corp" has ever been a "C Corp" or if it contains contributed appreciated property.And, of course, you need to consider your state laws in addition to federal laws.It sounds likely (but not certain!) that, considering soley tax reasons, the entity you contemplate would not select corporate status. Of course, there could be nontax reasons for selecting the corporate form of business.You should consult with a tax expert.Mike Lynch
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