Can I use an S corporation for real estate investing?

You can, sure. But most of the time, real estate investors shouldn’t use an S corporation. Let me explain why.

Typically, investing in real estate doesn’t rise to the level of an active trade or business. And that's really significant. Because real estate investing isn't considered an active trade or business, profits from real estate investing are subject to only to income tax. The profits are not subject to self employment tax.

The "no self-employment tax" angle is important. Because real estate investors typically would not pay any self-employment tax anyway, real estate investors who use an S corporation don’t get any extra self-employment tax savings from an S corporation. The only thing the real estate investor does by using an S corporation is complicate his or her tax accounting.

But wait, it gets worse...

Another reason to avoid using an S corporation for real estate investing concerns estate planning. You might not think so right now if you're just getting started in real estate and plan to own your properties for years and years. But you may eventually want to transfer ownership of your real estate to some other family member.

For example, perhaps after decades of successful real estate investing, you may decide that you want to begin to gift property or percentage interests in your property to your children or grandchildren.

Unfortunately, you will not be able to gift real estate from the S corporation to a child or grandchild without paying tax at the time of the asset is removed from the S corporation.

In comparison, if you own real estate individually or you own real estate through a limited liability company treated as a partnership, you will be able to gift the property without paying any income tax.

One final, quick caveat: An exception exists to the rule "Real estate investors shouldn't use S corporations." Some real estate investors aren’t really investors—at least according to tax laws. Some real estate investors are really property developers who renovate and rehab.

In this case, the profits that stem from the investor's real estate activities probably are subject to both income tax and self employment taxes. And, in this special case, the real estate investor may benefit by using an S corporation, just as with any other active trade or business does.

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