FUNDAMENTALS
ASSET PROTECTION
Using a C Corporation to Hold Real Estate
SHOULD THIS ASSET PROTECTION STRATEGY BE AT THE TOP OF YOUR LIST?
by Richard Hart
ith so many entity options available to hold real estate, many people wonder if the C corporation structure is the best one, especially given that the corporate tax rate is now a flat 21 percent. Let’s examine the tax mechanics of a C corporation to see why you may not want to use a C corporation to hold your real estate. First, a C corporation is not a pass-through entity. In other words, any net profit the corporation makes will be taxed at the corporate level, which is 21 percent. Now, if you plan on leaving the income that the corporation earns in the company and you are at a higher personal tax rate, this may seem like a good option. Note the example: Net profit of C corporation = $ 20,000 Tax rate of 21 percent = $ 4,200 Personal tax rate (assuming highest tax bracket) 37 percent = $ 7,400 Savings using a C corporation = $ 3,200 W
Alright! C corporation here I come! But hold your horses. Most people I know want access to spend their cash earned from their property. So that means you have to pull it out of the company. How do you get money out of a C corporation? Normally, you either pay yourself a salary or you take a dividend distribution of net profit. If you take all the net profit as a salary, this is what happens: Net profit of C corporation (before salary) = $ 20,000 Salary paid to yourself = $ 20,000 Net profit of C corporation after salary paid = $ 0 Tax rate of 21 percent = $ 0 Personal tax rate on $ 20,00 0 salary (assuming highest tax bracket) 37 percent = $ 7,400 Hmmmmm…we are back to square one. Paying taxes at the highest rate. No savings.
54 | think realty magazine :: november 2020
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