If your Accountant or someone else tells you to take title to Real Estate in an S-Corporation, don’t listen. Run the other way!
There are many adverse tax consequences if you own Real Estate in an S-Corporation. Many are detailed in the tables below.
Two of these adverse income tax consequences is that live or die, it’s a great gift to the IRS.
- If you die owning Real Estate in an S-Corp, your heirs will inherit your unrealized capital gain when they sell the Real Estate.
- When you own Real Estate in an S-Corp you forfeit the “step up in basis” that your heirs would enjoy if you had owned the Real Estate outright, or in a partnership, or an LLC.
- “Step up in basis” is the Federal Income Tax Benefit that excuses your heirs from the obligation to pay tax on the unrealized appreciation of property they inherit.
- If you sell the Real Estate in the S-Corp while you are alive,
- you incur capital gains tax within the S-Corp, and then
- are taxed again when you distribute the sales proceeds out of the S-Corp.
- Yes, here’s a situation where your pay “double tax” even though you were told that the S-Corp is a “flow through entity”.
On the other hand, neither of these adverse income tax consequences arises if you own the Real Estate outright, in a partnership, or in an LLC (taxed as a disregarded entity or partnership).
The tables below give you more details about the comparison of owning Real Estate in an S-Corp compared with an LLC.
Real Estate: S-Corp v LLC 2025-10-30
| Tax Feature | S-Corporation | LLC (Partnership Taxation) | Individual Ownership |
|---|---|---|---|
| Entity Taxation | Pass-through (no entity tax), but limited flexibility | Pass-through, highly flexible | Income and expenses reported on personal return |
| Depreciation Deductions | Allocated strictly by % ownership of Stock. No Special Allocations. | Special Allocation of losses among Members allowed | All deductions go to owner |
| Loss Deductions | Limited to basis in stock + shareholder loans to the company (not loans directly to the company). | Members get basis credit for shareholder’s loan to company and shareholder’s % interest in loans to the company | Fully available if active investor |
| Distributions of Property | Taxable—treated as sale at FMV (gain recognized) | Generally tax-free if doesn’t exceed basis | N/A |
| Appreciation When Sold | Gain taxed at shareholder level plus depreciation recapture up to 25%. Then taxed again (double tax) when distributed to shareholders. | Gain flows through; basis adjusted; no double tax | Gain reported directly on return |
| Step-Up in Basis at Death | No step-up in basis of the real estate; only step up in shareholder’s basis in the company stock. | Full step-up in basis of the real estate and other underlying assets | Step-up in property basis |
| Contributing Property | May trigger tax if liabilities exceed basis | Usually tax-free contribution under §721 | N/A |
| Refinancing / Liability Allocation | Doesn’t increase shareholder basis | Increases owner’s (partner’s) basis (favorable) | Affects individual directly |
| Ease of Sale / Exit | Stock sale simpler but less favorable to buyer (no asset basis step-up) | Asset sale gives buyer new step-up basis | Straightforward sale |
| Passive Loss Rules | Applies; often limits loss use | Applies; but easier to manage basis | Applies |
| Administrative Burden | Moderate but more complex than if an LLC (payroll taxes apply if owner-employee) | Moderate | Simple |
| Owners | Owners must be US individuals and certain Trusts. Limited number. | Owners (Members) can be any individual or entity. Unlimited | One person |
| Ownership Interests | Limited to one class of stock, can be voting or nonvoting. | No limits on definition of ownership interests. Can include forfeitable ownership interests, e.g., for employee incentives. | N/A |
| Asset (Liability) Protection | Strong if observe corporate formalities; but subject to “piercing the corporate veil”. | Very strong if organized in some states where a charging order is the exclusive creditor remedy (can’t pierce the corporate veil). In a few states, a single member LLC gets the same liability protection as a multi-member LLC. | No asset protection. |
| Best Use Case | Operating businesses, not real estate; provided that there is no desire to have more than one type of ownership interests. Also, Owners must be a limited number of US individuals, or limited types of trusts. | Real estate investments and operating businesses desiring creative ownership interests. Owners can be individuals or entities. | Small individual holdings |
Notes about S-Corps:
- Under state law, there is no such thing as an “S-Corp” or a “C-Corp”. An S-Corp is the same as a regular corporation.
- S-Corps and C-Corps are creatures of US Federal Income Tax Law. They are defined by US Federal Income Tax Law rules.
- When forming, buying, selling, or merging an S-Corp or a C-Corp you must comply with both State Law and US Federal Income Tax Law.
