Why I Do Not Recommend S Corps for Real Estate Investors
If you’ve ever been told to put your real estate property into an S Corporation to save on taxes — pause right there.
At Shahbaz & Associates CPAs, we specialize in working with real estate investors, and our number one recommendation when it comes to entity structure is simple:
Avoid using an S Corp to hold real estate.
Here’s why — and what to do instead.
1. It's Extremely Difficult to Take Property Out of an S Corp
Unlike an LLC or a partnership, distributing appreciated property out of an S Corporation is a taxable event.
Let’s break that down:
- You buy a property for $300,000
- It appreciates to $600,000
- You want to move it out of the S Corp to your personal name or another entity
➡️ You’ll trigger a capital gain on $300,000 — just for transferring your own property.
⚠️ This is a trap we’ve seen too many investors fall into after receiving generic advice that didn’t consider the long-term implications.
2. You Lose Flexibility for 1031 Exchanges
S Corps limit your ability to do 1031 exchanges — especially if the ownership structure changes or you want to defer taxes across multiple properties or investors.
With an LLC taxed as a partnership, you have more flexibility in:
- Drop-and-swap strategies
- Multi-member exchanges
- Entity structuring at the time of sale
💡 Real estate is a long game — and your structure should support tax strategies like 1031s, not block them.
3. You Miss Out on Partnership-Friendly Strategies
Partnerships (multi-member LLCs) allow for:
- Special allocations of income, loss, and cash flow
- More control over capital accounts
- Easier buy-in/out of partners or family members
S Corps, on the other hand:
- Require proportional distributions
- Limit ownership to U.S. individuals
- Restrict flexibility with equity classes
🧱 If you're building a real estate portfolio — especially with partners or family — an S Corp just doesn't give you room to grow.
4. The Payroll “Savings” Doesn’t Apply to Rental Income
Yes, S Corps can save money on self-employment tax — but only on active income.
Rental income is typically considered passive, so there's:
- No self-employment tax anyway, and
- No benefit from taking a “reasonable salary”
That strategy makes sense for real estate agents, flippers, or developers — not passive buy-and-hold investors.
📉 We've seen people pay for payroll processing unnecessarily just because they were told “S Corps save taxes.”
So What Should You Do Instead?
✅ Single-Member LLC
Great for holding individual properties with personal liability protection and pass-through taxation.
✅ Multi-Member LLC or Partnership
Ideal for joint ventures, family investing, and flexibility with distributions and 1031 exchanges.
✅ S Corp for Active Income Streams Only
We do recommend S Corps for real estate agents, brokers, and flippers — just not for property ownership.
Conclusion: The Right Structure Matters More Than You Think
Choosing the wrong entity for your real estate can cost you far more than you save on taxes. At Shahbaz & Associates CPAs, we help real estate investors choose the right structure for their strategy — and avoid irreversible mistakes.
Whether you're building a rental portfolio, doing BRRRR deals, or planning generational wealth — we’re here to help you do it smart.