“There is no preferential tax treatment of capital gains like there is on a personal tax return. ”
Now it gets far worse. Let’s say you do not pay yourself a salary and just take a dividend distribution of the net profit. Here is what will happen: Net profit of C corporation = $ 20,000 Tax rate of 21 percent = $ 4,200 Net profit dividend distributed to yourself = $ 20,000 Personal tax rate on $ 20,000 dividend (assuming highest tax bracket) 37 percent = $ 7,400 * Now you are paying double tax on the same income. First, the corporation paid its tax on the $20,000 at $4,200 and then you pay personal tax on the same div- idend income for an additional hit of $7,400 so in total $11,600 in taxes paid! *If your dividend is considered a qualified dividend it will be taxed at a flat personal rate of 15-20 percent depending on your personal tax bracket. Otherwise, it is taxed at your regular tax bracket. The above example was very high level and obviously everyone has a different situation and there are other scenarios to ‘borrow’ money out of the C-Corp without paying personal tax. But the bottom line is that unless you
plan on keeping the funds within the corporation it is not the best vehicle to use for tax savings, especially when the property is sold. The capital gains of the property will be taxed at 21 percent. There is no preferential tax treatment of capital gains like there is on a personal tax return. And now what do you do with that huge amount of cash if you do not plan on purchasing another property? Taking it out of the company will be costly. There are far better pass-through entities available to use now, such an LLC, S-Corp or LLP. With these entities you get the legal asset protection of a C-Corp but with the tax benefits derived from your personal income tax return. If you currently own real estate through a C corpora- tion, you should contact your tax adviser to determine what, if any action should be taken. •
Richard Hart, EA, CAA is an attorney with Hart & Associates, and has written many articles for the National Association of Residential Property Managers® (NARPM) publication, Residential Resource. Members of NARPM® receive information like this article every month through its news magazine, Residential Resource. Reprinted with permission. To join NARPM or to learn more, visit NARPM.org/join.
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