For a long-term rental you hold as an investment, usually no. Most people elect S corp status to cut self-employment tax. Rental income from real estate is already outside self-employment tax under IRC §1402(a)(1). So the S corp has little to save. It also brings costs a regular LLC does not have. In California, one of them is a 1.5% tax on the corporation's net income, including the gain when it sells.

This page answers the rental question. If you run an active business and want to know about S corp salary and Form 2553, read our S corp salary and election page.

Why the "just make it an S corp" tip misfires

The tip comes from operating businesses. A sole proprietor pays self-employment tax on business profit. An S corp lets the owner split pay into a wage and a distribution, and the distribution skips payroll tax. That math is real, and it is on our S corp page.

Rental income never had that problem. Treas. Reg. §1.1402(a)-4 excludes rentals from real estate from self-employment income unless you are a real estate dealer. Moving the property into an S corp cannot lower a tax you were not paying.

The salary piece can make it worse

An S corp shareholder who works for the company is expected to take reasonable pay for that work. If you manage your own rental inside an S corp, a wage for that work brings payroll tax. The same work on a rental you hold in an LLC brings none.

When rent stops being rent

Hotel-style service changes the answer. The same regulation says payments are not rentals from real estate when you also provide services mainly for the occupant's convenience, such as maid service. That income can be self-employment income. Some short-term rentals land here. That is a different analysis. See short-term rentals without REPS.

Where holding rentals in an S corp costs you

Loss basis is tighter

Depreciation and cost segregation often create losses in the early years. An S corp shareholder can deduct losses only up to stock basis plus loans the shareholder made directly to the corporation (§1366(d)). A bank mortgage the corporation takes out adds nothing to your basis. Guaranteeing that loan adds nothing either until you actually pay on it (Treas. Reg. §1.1366-2(a)(2)).

An LLC taxed as a partnership works differently. Members generally get basis for their share of the LLC's debt (§752). A single-member LLC is disregarded, so the property and the mortgage are simply yours on Schedule E.

Getting the property out is a taxable event

If the S corp distributes appreciated property to you, §311(b) treats the corporation as if it sold the property at fair market value. The gain flows through to your return, and no cash came in to pay the tax. Liquidating the corporation does the same thing under §336. Owners often find this out when they deed a property out to fix the structure. A partnership can often distribute property without current gain under §731, though there are exceptions.

Getting it in can be taxable too

Putting a property into a corporation can trigger gain under §357(c) when the debt on it is more than your tax basis. That happens with older rentals that were refinanced. It can also happen without a deed. If an LLC that already owns a mortgaged rental elects S status, the tax rules treat the LLC's assets and debts as contributed to a new corporation (Treas. Reg. §301.7701-3(g)(1)). Talk to us before anyone files Form 2553 on a rental LLC.

1031 exchanges get rigid

The corporation owns the property, so the corporation does the exchange. Stock is not real property, so shareholders cannot exchange their shares. Owners sometimes want different things. One wants cash, and one wants to keep exchanging. An S corp has fewer ways to split up without tax than a partnership-taxed LLC. See swap and drop for what partners sometimes do and the risks that come with it.

No step-up for the building at death

When a shareholder dies, the heirs get a stepped-up basis in the stock (§1014). The corporation's basis in the building does not change. S corps have nothing like the §754 election partnerships use to step up the property's basis inside the entity. So the corporation keeps depreciating the old basis, and a later sale can produce gain the family assumed was gone.

The 1.5% California tax

A California S corporation pays 1.5% of its California net income, with an $800 minimum. That covers rental profit and the gain when the corporation sells. An LLC that is not taxed as a corporation does not pay the 1.5%. It pays the $800 annual tax, plus an LLC fee once its total income from California sources reaches $250,000 (R&TC §17942).

Simple arithmetic, not a client example. On $100,000 of net rental income, 1.5% is $1,500 a year. On a $1,000,000 gain when the corporation sells, it is $15,000.

More returns for the same tax result

An S corp files Form 1120-S and California Form 100S every year and sends K-1s to its owners. Payroll filings come in if it pays wages. With no self-employment tax savings, nothing on the other side pays for that work.

Former C corporations carry one more trap

If the corporation used to be a C corporation and still has earnings and profits from those years, rents can trigger the §1375 tax on excess net passive income. That tax is charged at the top corporate rate, which is 21%. If the corporation still has those earnings at the end of three straight years, and passive investment income is more than 25% of gross receipts in each of those years, the S election ends (§1362(d)(3)). Most new rental entities never face this. It matters if someone suggests converting an old family corporation.

What it does not change

An S corp does not change the passive loss rules. Rental income and losses still come to you on a K-1, and the REPS and passive loss rules apply to you as the shareholder. It does not take rental income out of the 3.8% net investment income tax either. That turns on REPS and a trade-or-business test. See do real estate professionals pay the 3.8% NIIT.

What most landlords use instead

  • Single-member LLC. Disregarded for federal income tax. The rental goes on your Schedule E. The liability protection comes from the LLC, not from an S election.
  • Multi-member LLC. Taxed as a partnership by default. It files Form 1065 and gives each owner a K-1. It fits rentals because of debt basis under §752 and more flexible distributions. See partnership taxation for real estate investors.

Many investors use one LLC per property or per risk. That is a liability decision for you, your attorney, and your insurer. If there is a mortgage, ask the lender before moving title. In California, moving title into any entity is also a property tax question. Read Prop 13 and LLC ownership before anyone records a deed.

When an S corp does help a real estate investor

Keep title in the LLCs. Look at an S corp for active income, the kind that already pays self-employment tax:

  • A property management company that earns management fees. If it manages your own rentals, the fees have to be real and at market rates, with separate books.
  • Flipping. Profit on property held for sale to customers is dealer income and can be self-employment income.
  • Brokerage. Commissions earned as an agent or broker. See do real estate agents qualify for REPS for how that work interacts with rental losses.
  • Construction and development work done for others.

For any of those, the salary and Form 2553 questions are on our S corp salary and election page.

Already have rentals in an S corp?

Do not deed the property out before running the numbers. §311(b) can turn that deed into a taxable sale. Sometimes staying put costs less than leaving. A sale, a refinance, an owner who wants out, or estate planning is a good reason to look now. Bring the last three years of Form 1120-S, the depreciation schedules, and the mortgage statements.

Frequently asked questions

Should I put my rental property in an S corp?

Usually no for a long-term rental held as an investment. Rental income is already outside self-employment tax, so an S corp has little to save. It adds tighter loss limits, taxable exits, more returns, and in California a 1.5% tax on the corporation's net income. Most landlords use a single-member LLC or a multi-member LLC taxed as a partnership.

Can an S corp own rental property?

Yes. The question is whether it should, and for buy-and-hold rentals the answer is usually no because of loss basis limits, the tax on distributing property, 1031 rigidity, and California's 1.5% tax.

Does rental income owe self-employment tax?

Generally no. Under IRC §1402(a)(1) and Treas. Reg. §1.1402(a)-4, rentals from real estate are excluded from self-employment income unless you are a real estate dealer. Hotel-style services such as maid service can change that.

Do I have to pay myself a salary if my S corp only owns rentals?

The reasonable pay rule follows the work you do for the corporation. If you do real work, like managing the property, the IRS expects a reasonable wage for it, and that wage brings payroll tax. The same work on a rental held in an LLC brings no payroll tax.

Can an S corp do a 1031 exchange?

Yes, at the corporate level. The corporation sells and buys the property. Shareholders cannot exchange their stock, because stock is not real property. Owners who want different outcomes also have fewer tax-free ways to split up than partners in an LLC.

What does an S corp cost a California landlord?

A California S corporation pays 1.5% of its California net income, with an $800 minimum. That includes gain when it sells. An LLC not taxed as a corporation pays no 1.5% tax. It pays the $800 annual tax, plus an LLC fee once its total income from California sources reaches $250,000 (R&TC §17942).

When does an S corp make sense in real estate?

When the income is active and already subject to self-employment tax. Property management fees, flipping, brokerage commissions, and construction work are the usual examples. Keep the rentals in LLCs and put the active business in the S corp if the numbers support it.

Talk it through with us

Bring your entity documents, the deed or title report, the mortgage statement, and your last return. We will tell you whether your rentals belong where they are and what a change would cost. Book a free 30-minute New Client Introduction.

LaviCPA is a Los Angeles CPA firm for real estate investors. Shawn Lavi, CPA, is the firm's principal. Elias Lavi, CPA, is its founder and co-owner.