How to Use an S Corp for Rental Property Ownership (2024)

Owning property is a great way to invest in an asset that will appreciate in value, and renting the home on the property to tenants can bring in some extra income on your own schedule. However, if you don’t have the proper legal safeguards in place, losses and liabilities related to property rental could affect your personal finances.The best way to protect your personal and business assets when renting your property is by owning your rental through a business entity, and one of the most common business entities for a situation like this is an S corp.

What Is an S Corp?

An S corp is a corporation that chooses to move income, deductions, credits, and losses through to the corporation’s shareholders for tax purposes. A Schedule K-1 is used to report income and losses to each of the S corp’s shareholders, and they report their income and losses from the Schedule K-1 on their personal tax documents.

Another corporation option is an LLC, which can provide similar benefits. Property owners must consider several factors before deciding which type of corporation to form.

What Are the Benefits of an S Corp for Rental Property Ownership?

Some landlords prefer to form an S corp for rental property management for many reasons. Not only does an S corp limit the landlord’s personal liability in a property rental situation, but it also can reduce costs at tax time.

S corps pass income and losses through the corporation to personal accounts so they can be assessed at the landlord’s income tax rate as an individual, not at the rate of a property rental business.

Using an S corp for rental property ownership can have certain downsides. In order to stay in good legal standing, S corps must hold annual shareholder meetings and file tax documents every year, even though S corps aren’t usually responsible for any taxes.

Essentially, if you don’t mind keeping up with the paperwork from year to year, an S corp can have some significant benefits.

Steps to Creating an S Corp for Rental Property Landlords

Now that you understand some of the most important benefits of S corps for landlords, you may be wondering what you need to do in order to create an S corp and start using it for your property rentals.

Register Your Business

First, you’ll need to create a unique business name. Use the online federal trademark database to check that your name idea is available before filing. Keep in mind that registering an S corp and reserving a business name usually incurs a small fee, depending on which state you live in.

File the Articles of Incorporation

Articles of incorporation will vary from state to state, so make sure you get yours from your state’s Secretary of State. The articles will ask for the name of your business, the directors’ names, the corp’s primary physical address, and the contact information of whoever will be responsible for legal documents addressed to the S corp.

Make Bylaws

Bylaws are rules of operation for your S corp and are especially important if you plan for your S corp to have multiple directors working together, as they can help to prevent unnecessary confusion or tension between directors.

S corp bylaws can contain different types of information, but they usually include some combination of the corp’s contact details, information about how shareholder meetings are held, the number of directors, and the names of people who have access to the corp’s documents.

Get Permits and an EIN

Different states require different permits regarding business licensing and tax collection, so make sure you’re up-to-date with your state’s required S corp permits. Additionally, your S corp will need to obtain an employer identification number, or EIN, to legally carry out all business matters.

Elect Your Corporation for S Corp Status

The last step in creating an S corp is electing your corporation to S corp status. To do this, you’ll need to fill out IRS Form 2553 within 2 months and 15 days of the beginning of the tax year. If you miss this deadline but your S corp status is still approved, it won’t be able to go into effect until the next tax year.

Once approved, S corp status is effective indefinitely as long as you follow the proper steps for upkeep.