A Tax question for a Corporation?
April 4, 2010 
3 Comments
My friend owns several rental properties that produces income each month. Because of the age of the property she is concerned about her potential liability from accidents on the property. So, she formed a Rental Corporation and transferred ownership of the rental properties to the corporation. Then tenant are still paying her monthly rent and she deposits it in her Person Checking Account not a business account.
Is she the one who is suppose to get taxed on the income or are the tenants. I told her she gets taxed because it’s her income for providing services. Am I wrong?
How would the tenants be taxed on the income? It’s not THEIR income!
The CORPORATION is taxed on the income. To add insult to injury, any dividends that she pulls out of the corporation are taxed again on her personal return. She needs to keep her business and personal finances separate. She also needs to consult with a tax professional (a CPA or EA, not a storefront tax prep mill) who specializes in small business tax issues.
Putting the real estate in a corporation is normally a LOUSY idea from a tax standpoint and she may wish to reconsider her options. Her dwelling fire policy should provide sufficient liability protection, both for the rental assets AND her personal assets, far more so than a corporation ever would. She also has capital gains issues to contend with by transferring the property to the corporation.
Why would her tenants have to pay a tax?
Real estate should never be held in a corporation.
References :
How would the tenants be taxed on the income? It’s not THEIR income!
The CORPORATION is taxed on the income. To add insult to injury, any dividends that she pulls out of the corporation are taxed again on her personal return. She needs to keep her business and personal finances separate. She also needs to consult with a tax professional (a CPA or EA, not a storefront tax prep mill) who specializes in small business tax issues.
Putting the real estate in a corporation is normally a LOUSY idea from a tax standpoint and she may wish to reconsider her options. Her dwelling fire policy should provide sufficient liability protection, both for the rental assets AND her personal assets, far more so than a corporation ever would. She also has capital gains issues to contend with by transferring the property to the corporation.
References :
Your Accounting GURU Here
Number 1: Your friend should have opened up an LLC "Limited Liability Corporation": This way she could protect her assets in case of a lawsuit: There are "At-Risk" Limitations when you are business:
Number 2: She needs to deposit her Rental Payments into her business checking account, and not her personal account. This way if there is any legal contingencies, no one can attach her personal account.
Number 3: An LLC is a passthrough entity. It does not pay taxes, the taxes are passed down to the owners (shareholder).
Look at the website below to help your friend:
Also, she needs to study the "Federal Fair Housing Laws"
Ernest Hinton
Accountant GURU
References :
http://www.nolo.com