Somewhere in your investment journey you expanded your portfolio and bought a triple net lease property. That successful investment encouraged the purchase of additional property. As time continued that investment portfolio grew with two, three, four, or more triple net properties.
It has been great having those paychecks come in like clockwork every month, but you hear rumblings from other investors about taxes… lots of them.
Does this sound familiar?
If this is the situation you are currently in, you are probably wondering if should you keep everything under your name. Or, at this point, does it make sense to use a corporation for your NNN properties?
The following options provide explanations to various decisions smart investors make about putting their triple net lease properties in an LLC or Corporation.
Why You Shouldn’t Keep Everything Under Your Name
When all properties are kept under a person’s own name, all of these investments are under a personal Social Security number.
This is great for the person receiving all the income, but it means this person is also responsible for liability if something happens. In this case, the owner of the investments is considered the business’s sole proprietor.
Despite some advantages, many investors – rightfully so – worry that a liability suit could wipe out any tax advantages.
Should You Use an LLC?
An LLC, or limited liability company, is a legal entity that limits liability to the owner. Because the owner is not held personally liable if the property is foreclosed upon or someone is hurt on the property, this entity is one many investors choose.
Some investors choose to use what is termed a series LLC. The series LLC works by having a master LLC – the parent- and individual LLC’s – the “children.” Each LLC, termed a series, is a completely separate entity. Each holds not only its own properties but has separate bank accounts, addresses, etc.
Although the owner is not held personally liable in an LLC, in the eyes of the IRS it isn’t considered a separate tax entity. Thus income is passed onto the owner, as are any expenses, taxes and depreciation that come with the properties.
Worried About Liability More Than Taxes? Try A Corporation
A corporation can be either an S-corporation or a C-corporation both with many similarities, yet some key differentiating factors. S-corporations cannot have more than 100 shareholders, and all of those shareholders have to be either U.S. citizens or permanent residents. This maximum of 100 shareholders includes the regulation that they can only issue one type of stock.
Additionally, differences include the rules and regulations of taxes. Until 2017, many investors preferred an S-corporation. An S-corporation doesn’t pay taxes; instead, the owner or owners reported the company income as their personal income. This meant investors didn’t have to pay corporate taxes.
Up until the new tax bill, if you owned a C-corporation on the other hand, you paid taxes twice: the company paid tax on its income as a corporation, and you paid taxes on what you received from the company as personal income.
However, C-corporations now pay a flat 21%, compared to the S-corporation’s 20% write-off on your 1040. Still, you might have a hard time deciding which to choose, especially since with a C-corporation you’ll still get taxed twice when you decide to sell a property – once as a corporation and once when you pay personal taxes on that income.
To Wrap it Up
There’s still a lot up in the air with the new tax bill, and more decision making to come as time goes on. The question of should you put your triple net lease properties in an LLC or Corporation is up to your investment needs. To decide which one will give you the best tax advantage, you should consult a CPA experienced in commercial real estate.