Generally, there is no rule preventing you from buying real estate for personal use through your S Corporation, C Corporation, or LLC. However, if you plan to use your business to purchase personal property, there are important tax distinctions to keep in mind with each type of company.
Using an S-Corp to Buy Personal-Use Property
There is no rule prohibiting the purchase of personal-use property through an S-Corp. An S-Corp is a corporation with a special tax status that allows the corporation’s income to be passed through to shareholders. Owning real estate through an S-Corp has the obvious benefit of shielding personal financial liability from any loss or the property may incur. If you buy personal property through your S-Corp, any earned income on the property would be passed through directly to the shareholders on their individual tax returns. This means that if you decide to use the property for any rental purposes, the rental income would be passed to the shareholders as passive investment income. Another consideration is that your S-Corp’s board of directors and shareholders can object to the property purchase.
However, while purchasing real property through an S-Corp is legal, there are serious tax implications at play. If your S-Corp owns a residential property and the property is subsequently distributed to a shareholder, including yourself, any financial gains on the property become taxable at an unattractive rate. S-Corps are classified as corporations for tax code purposes. Accordingly, any appreciating property taken out of the S-Corp immediately triggers capital gains tax. For example, if you purchase residential property through your S-Corp, and the property appreciates in value, you will face built-in capital gains tax upon transferring the property. In other words, you cannot transfer the property from the S-Corp to yourself, your family, or anyone without immediately facing a 15-20% built-in capital gain tax on any appreciation of the property’s value. If the property is not transferred out of the S-Corp, you can defer the capital gains tax. Unless you are confident that you will never want or have to transfer the property out of the S-Corp, it may not be beneficial to buy the property through your S-Corp.
Using a C-Corp to Buy Personal-Use Property
You can use your C-Corp to purchase personal-use property. However, there are significant tax disadvantages to doing so. A C-Corp is not a pass-through entity, meaning that the C-Corp will not pass through all income and expenses on to the owner’s personal tax return. If your property appreciates in value and you subsequently distribute the property to yourself, you will be subject to the corporate income taxes and personal income taxes.
Using an LLC to Buy Personal-Use Property
There is no rule or regulation prohibiting the purchase of a personal-use second home through an LLC. Buying personal property through your LLC affords you protection from personal financial liabilities the property may incur, as the LLC is a separate entity that owns the property. Additionally, if you subsequently decide to use the property for rental purposes, you can avoid double taxation on any rental income. As an LLC owner, you can take advantage of pass-through taxation, and can have all the property’s income flow through to your personal tax return. Buying a house under an LLC also affords you more privacy in terms of shielding your name as the purchaser in public records.
LLCs are also subject to capital gains taxes. However, LLCs may choose to be taxed as partnerships or corporations. Choosing to be taxed as a corporation subjects you to immediate capital gains tax. A partnership structure, however, allows you to defer the gain taxes until the property is sold. Under an LLC, you can make a tax-free distribution of your appreciated property that qualifies as a deferral instead of a taxable event.
A disadvantage to buying personal property through your LLC, as through any company, is that you cannot qualify for a homestead property tax exemption if the property eventually becomes your permanent residence.
If you would like to learn more about using your business to purchase a personal-use second home, do not hesitate to contact one of our experienced business attorneys at EPGD Business Law.
