Key Takeaways:
- Choosing the right entity structure is a key first step for protecting your real estate investment and managing tax exposure.
- For most new investors, an LLC offers a strong balance of liability protection, flexibility, and tax efficiency.
- In most cases, avoid holding real estate in C corporations or S corporations — which can trigger costly tax consequences and limit your options.
If you're starting to invest in real estate — whether you're buying a rental property, acquiring a building for your growing business, or simply trying to protect your personal assets — one of the first questions you'll face is: Should I form a legal entity, and if so, which one?
While this article will discuss the various ways to hold real estate and the entities associated with holding property, it should in no way be construed as legal advice. Please consult with your attorney to discuss the legal implications of setting up an entity to hold real estate.
Choosing the right business structure can help you limit your liability, simplify your taxes, and avoid costly mistakes down the line. But for first-time or less experienced real estate owners, the differences between LLCs, S corporations, and C corporations can be confusing.
Let's break it down in a simple, straightforward way — so you can make smarter decisions about how to hold your real estate.
First, Why Use an Entity at All?
If you hold real estate in your personal name, you're exposed. If something goes wrong — like a tenant injury or a lawsuit — your personal assets (your home, bank account, or other real estate investments) could be at risk. Having an insurance policy to protect against this is also a good idea and should definitely be implemented; however, this does not guarantee complete protection if something goes wrong.
That's why many investors choose to hold property through a legal entity. Not only can it help shield your personal assets, but it also opens the door to more flexible ownership arrangements and, in some cases, tax advantages.
Now that you understand why holding real estate in a legal entity is valuable, the next step is choosing the right type of entity. Let's explore the options.
Limited Liability Company (LLC): The Go-To for Real Estate
Best for:
Most real estate investors — especially those buying and holding rental properties.
Liability Protection:
An LLC creates a legal wall between the property and your personal finances. If something goes wrong, creditors can only go after what's inside the LLC.
Tax Treatment:
An LLC is a "pass-through" entity by default. That means the income, deductions, and gains from the property flow directly to you (or you and your partners) avoiding entity-level tax. Certain states may assess a minimum fee based on gross receipts.
- Single-owner LLCs are taxed like sole proprietorships. These entities are called single-member LLCs.
- Multi-owner LLCs are taxed as partnerships. These entities are called multi-member LLCs.
You can also elect to have an LLC taxed as an S corporation or C corporation — but, for real estate, that's almost never the best move (refer to the sections below to see why).
Flexibility:
The real property itself can generally be transferred without triggering a tax event — something that's not true for corporations. In addition, distribution rules are less restrictive than in other entities (such as S corporations), allowing for distributions that aren't tied to ownership (as long as permitted by the operating agreement).
Cost:
In many states, forming and maintaining an LLC is relatively inexpensive. In California, for example, there's an annual $800 fee plus a small gross receipts fee once income exceeds $250,000.
Bottom Line:
If you're asking where to put your rental property, the default answer is often an LLC.
C Corporation (C Corp): A Costly Mistake for Real Estate
Best for:
Operating businesses — but not real estate.
Liability Protection:
Strong — but not worth the tradeoffs for tax purposes.
Tax Treatment:
This is where things really fall apart. While real estate can go into a corporation tax-free, it can never come out tax free.
- C corps are taxed twice: once when the corporation earns income and again when it pays you dividends.
- If you sell a property held in a C corp, the gain is taxed at the corporate level, then taxed again when the profits are distributed as corporate dividends.
Getting Assets Out:
Want to move the property out of the C corp? You'll trigger a taxable event — the IRS treats it as if you sold the property at fair market value.
Bottom Line:
Avoid holding real estate in a C corp. It's almost always a mistake unless there's a very specific strategy in play — and if you're reading this article, that probably doesn't apply to you.
S Corporation (S Corp): Great for Businesses, Not for Buildings
Best for:
Operating businesses — not real estate holdings.
Liability Protection:
S corps offer similar liability protection to LLCs.
Tax Treatment:
Here's where problems start: While an S corp also avoids double taxation, real estate inside an S corp creates a lot of tax complications.When appreciated property (property whose value has risen in excess of the purchase price) is distributed, gain is recognized in the same manner as if the S corporation had sold the property to the shareholders at fair market value. The result is the property is in the hands of the shareholder, but there is taxable gain with no cash to pay the tax.
- Selling the property? That gain passes through to you — but you may still face state-level tax in some cases. California has a minimum tax at the corporation level of 1.5%. The taxpayer will also pay tax at the individual level as well.
Restrictions:
Ownership in an S corp is tightly regulated (only U.S. individuals and certain trusts can be shareholders), which can complicate things if you're investing with friends or family. All distributions of income/losses are distributed according to ownership percentage. Any cash distributions must be made in the same percentage of ownership or the S corporation election may be broken.
Bottom Line:
Don't put real estate into an S corporation. It's not built for holding appreciating assets like property and you'll likely regret it come tax time.
Do You Have to Use an Entity?
Technically, no. You can hold real estate in your own name. Some co-owners use tenancy in common, where each person holds an undivided share and reports their portion of income and expenses individually.
But keep in mind: no legal entity means no liability protection. That might work for low-risk situations — but, even with insurance, you're taking a gamble.
A popular option is the single member LLC (SMLLC). A SMLLC has only one owner (member) and is generally treated as a "disregarded entity" for federal tax purposes under IRS "check the box" entity classification regulations. This means the IRS views the LLC's activities as being conducted by its sole member.
A disregarded entity provides similar liability protection under state law to a corporation. In other words, it can give you the best of both worlds: favorable tax treatment and limited liability.
When Might You Want Multiple LLCs?
As your portfolio grows, you might consider using multiple LLCs to group properties by risk level or value. That way, if something happens in one, the others are shielded. Liability and loss are limited to the assets held in the LLC.
For example, a client of ours owns four rental properties. He set up two LLCs: one for two single-family homes in stable neighborhoods, and another for higher-turnover rentals that carry more risk. It's a simple, cost-effective way to contain potential legal exposure.
The Bottom Line: Keep It Simple, Keep It Smart
If you're starting out in real estate investing — whether you're buying a rental home, an office for your business, or a short-term Airbnb — forming an LLC is usually the smartest and simplest move.
It gives you:
- Personal liability protection (limits losses to assets within the legal entity)
- Flexible ownership options
- Favorable tax treatment
- Flexibility to move assets out of the LLC at cost rather than triggering a tax event
Just as important: It helps you build your real estate investments on a solid foundation — and avoid costly mistakes down the road.
Not sure which direction to go? It's worth a quick conversation with your tax advisor or accountant before you buy. A little upfront planning can save you a lot of money and headaches later.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
