Attn: taxjunkie!!! Help, need advice
Hello,
I am a newbie to the investing world and am pursuing it through a corporation I started. Purposes will be for buying and holding of multiple unit buildings for rental or Section 8?I am needing any helpful suggestions and/or tips for success. I am looking for an evaluation sheet for apartment purchasing and would be grateful for any links or imput on this as well. Financing tricks and NOO guidelines as well for corporations? Do finance companies take into consideration or secure mortgages from the rental income? Any Section 8 benefits? Any response to this would be greatly appreciated.
Regards,
ddean75
ddean75:
Quite a few questions there! In my investing career, I have stayed away from Section 8 housing. Personal preference really. I know many investors that like it, but I find I have too many tenant problems, the housing authority telling me minor nuisances that may be wrong with my property that I have to fix, etc.
With regard to the choice of entity, my preferred choice is the LLC, followed by a very distant second (and only for flip deals or dealer transactions), an S corporation. I stay away from C corporations for almost every business or real estate transaction. Rarely should a non-publicly held corporation be formed as a C corporation.
Taxjunkie
Thanks for the reply, I know I went overboard there I put the cart before the horse when it came to these questions because most of my answers were found in the other forums immediately after I posted this topic. Thanks for your info and your knowledge to this investor group has shown invaluable.
Taxjunkie, you mentioned that you stay away from C-Corporations. Is that because in a C-corp you would be a stock holder and thus a better target in a lawsuit? I've heard that come up before and was wondering why as a "member" in an LLC it is safer than a "stockholder" in a C-Corp.
Thanks Taz
taxjunkie
What are the down falls to using a "C corp"? Is lt just the double tax or is there more? Please explain.
Thanks
Sire
The down fall of using a C corporation really is a tax question -- i.e., the double taxation of profits from a C corporation. It has nothing to do with whether you get more or less liability protection under state law. In fact, you get no difference in liability protection between an S corporation or a C corporation.
However, in my view the LLC is much superior to the S corporation or the C corporation for liability protection because of the "charge order" concept in most state's LLC statute. A charge order means that the creditor cannot foreclose (and thus become of the owner) on the LLC interests like they can for stock in a corporation (yes, stock in either an S or C corporation). A charge order creditor only has financial rights; i.e., rights to distributions of profits if, and only if, the managers of the LLC decide to make a distribution to the members. The charge order creditor has no rights to voting or management decisions. This can effectively prevent a creditor from controlling your real estate owned by an LLC.
However, you need to watch out for single member LLCs. There is some recent bankruptcy cases where the bankruptcy court disregarded the charge order provision in the statute. I personally think the court would be overturned on appeal, but the case involved some fraud, so I can see why a court would rule against the owner of the LLC in such a circumstance.
I am amazed by the number of people that still think the C corporation is the way to go. Those people are either uninformed (which is usually the case) or unwilling to learn the differences. SO YOU CAN PASS THIS ON TO OTHERS ASKING THE SAME QUESTION ... TAXJUNKIE SAYS "IT IS VERY RARE WHERE REAL ESTATE SHOULD BE HELD IN A C CORPORATION."
(If you are wondering why I said "rare" rather than "never" because there are some remote cases where I have used a C corporation to own real estate. One example was setting up a REIT (real estate investment trust). But that was only because the tax law provides that the C corporation would not have a double layer of tax if at least 95% of the income was distributed each year, and other provisions of the REIT tax rules were followed. Rarely do I find most REI setting up REITs. Only if you were going to publicly offer stock in the REIT for sale (that complied with securities solicitation laws) should you consider setting up a REIT and using a C corporation as the entity to hold the REIT property.
(even then, I will use single member LLCs owned by the C corporation REIT to own individual properties).
Hope that helps,
Taxjunkie